Financial Accounting Review
Chapters 1-9
Chapter 1
42.A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.
54.
Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii.
During the time Jill is away from the business, Jack increases the debts of the business by $20,000.
Which of the following statements is true regarding this debt?
a. Only Jack is personally liable for the debt, since he has been the managing partner during that time.
b. Only Jill is personally liable for the debt of the business, since Jack has been working and she has
not.
c. Both Jack and Jill are personally liable for the business debt.
d. Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate
legal entity.
76.
The liability created by a business when it purchases coffee beans and coffee cups on credit from
suppliers is termed a(n)
a. account payable.
b. account receivable.
c. revenue.
d. expense.
79.Borrowing money is an example of a(n)
a. delivering activity.
b. financing activity.
c. investing activity.
d. operating activity.
83.Buying assets needed to operate a business is an example of a(n)
a. delivering activity.
b. financing activity.
c. investing activity.
d. operating activity.
120.
Pinson Company began the year with retained earnings of $550,000. During the year, the company
recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was
Pinson’s retained earnings at the end of the year?
a. $910,000
b. $630,000
c. $1,010,000
d. $480,000
126.
The accounting equation may be expressed as:
a. Assets = Stockholders’ Equity – Liabilities.
b. Assets = Liabilities + Stockholders’ Equity.
c. Assets + Liabilities = Stockholders’ Equity.
d. Assets + Stockholders’ Equity = Liabilities.
155.
Elston Company compiled the following financial information as of December 31, 2012:
Revenues
$420,000
Common stock
90,000
Equipment
120,000
Expenses
375,000
Cash
105,000
Dividends
30,000
Supplies
15,000
Accounts payable
60,000
Accounts receivable
45,000
Retained earnings, 1/1/12 225,000
Elston’s stockholders’ equity on December 31, 2012 is:
a. $315,000
b. $330,000
c. $240,000
d. $360,000
Be. 176
Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n):
(O) operating activity, (I) investing activity, or (F) financing activity.
O __ a.
Cash receipts from customers.
F___ b.
Issuance of common stock for cash.
F___ c. Payment of cash dividends.
I ___ d.
Cash purchase of equipment.
O __ e.
Cash payments to suppliers.
I ___ f. Sale of old machine for cash.
Be. 178
Use the following information to calculate for the year ended December 31, 2012 (a) net income (net loss), (b)
ending retained earnings, and (c) total assets.
Supplies
$ 1,000
Operating expenses
12,000
Accounts payable
9,000
Accounts receivable
3,000
Common stock
9,000
Retained earnings (beginning)
5,000
(a)
$4,000
(b)
$8,000
Revenues
Cash
Dividends
Notes payable
Equipment
(c)
$30,000
$16,000
15,000
1,000
1,000
11,000
Be. 180
Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Balance
Sheet (BS), or Retained Earnings Statement (RE):
a. IS __ Service Revenue
g. BS __ Accounts Receivable
b. IS __ Utilities Expense
h. BS __ Common Stock
c. BS _ Cash
i.
BS __ Equipment
d. BS _ Accounts Payable
j.
IS ___ Advertising Expense
e. BS _ Supplies
k. RE __ Dividends
f.
IS __ Salaries and Wages Expense l.
BS __ Notes Payable
Chapter 2
58.A current asset is
a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. expected to be converted to cash or used in the business within a relatively short period of time.
62.
Trademarks would appear in which balance sheet section?
a. Intangible assets
b. Investments
c. Property, plant, and equipment
d. Current assets
72.
These are selected account balances on December 31, 2012.
Land
$100,000
Land (held for future use)
150,000
Buildings
600,000
Inventory
200,000
Equipment
450,000
Furniture
100,000
Accumulated Depreciation
300,000
What is the total amount of property, plant, and equipment that will appear on the balance sheet?
a. $1,300,000
b. $1,100,000
c. $1,600,000
d. $950,000
74.
Ratios that measure the income or operating success of a company for a given period of time are
a. liquidity ratios.
b. profitability ratios.
c. solvency ratios.
d. trending ratios.
86.K2 Corporation has assets of $1.80 million, common stock of $468,000, and retained earnings of $285,000.
What are the creditors’ claims on their assets?
a. $1,617,000
b. $ 753,000
c. $1,047,000
d. $1,983,000
93.
For 2012 Kuhlman Corporation reported net income of $28,000; net sales $400,000; and average share
outstanding 12,000. There were no preferred stock dividends. What was the 2012 earnings per share?
a. $2.33
b. $0.43
c. $33.33
d. $7.43
107.
Dividends appear on
a. the retained earnings statement only.
b. the income statement only.
c. both the retained earnings statement and the balance sheet.
d. the balance sheet only.
127.
Based on the following data, what is the amount of current assets?
Accounts payable………………………………………………………..
Accounts receivable……………………………………………………..
Cash……………………………………………………………………….
Intangible assets…………………………………………………………
Inventory………………………………………………………………….
Long-term investments………………………………………………….
Long-term liabilities………………………………………………………
Short-term investments………………………………………………….
Notes payable…………………………………………………………….
Plant assets………………………………………………………………
Prepaid expenses………………………………………………………..
a.
b.
c.
d.
134.
$62,000
100,000
30,000
100,000
138,000
160,000
200,000
80,000
56,000
1,340,000
2,000
$192,000
$350,000
$212,000
$210,000
Using the following balance sheet and income statement data, what is the current ratio?
Current assets
$ 9,000
Net income
$ 12,000
Current liabilities
4,000
Stockholders’ equity
24,000
Average assets
44,000
Total liabilities
6,000
Total assets
30,000
Average common shares outstanding was 10,000
a.
b.
c.
d.
1.75 : 1
2.00 : 1
0.44 : 1
2.25: 1
BE. 208
These selected condensed data are taken from a recent balance sheet of Sanson Company (in millions of
dollars).
Cash
$ 2.2
Accounts receivable
10.4
Inventories
18.0
Other current assets
11.1
Total current assets
$ 45.7
Total current liabilities
$ 24.8
Additional information: Current liabilities at the beginning of the year were $35.6 million.
What are (a) the working capital, and (b) the current ratio?
a. $20.9
($45.7 – $24.8)
b. 1.84: 1
($45.7/$24.8)
BE. 213
Each of the following statements is justified by a characteristic or constraint of accounting. Write the letter in
the blank next to each statement corresponding to the characteristic or constraint involved.
a.
b.
c.
Comparability
Materiality
Verifiable
d.
e.
f.
Consistency
Relevance
Faithful representation
D_ 1.
A company uses the same accounting principles from year to year.
C_ 2.
Information that is free from error.
B 3.
A company decides to expense capital items that cost less than $500 each.
E_ 4.
All factors that could affect a decision will be considered.
F_ 5.
Outside documents will be used to verify transactions whenever possible.
Ex. 218
The following items are taken from the financial statements of Tracy Company for 2012:
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Equipment
Advertising Expense
Cash
Common Stock
Depreciation Expense
Dividends
Equipment
Insurance Expense
Note Payable (due 2015)
Prepaid Insurance
$ 15,000
11,000
38,000
21,000
24,000
90,000
12,000
15,000
210,000
3,000
70,000
6,000
Rent Expense
Retained Earnings (beginning)
Salaries Expense
Salaries Payable
Service Revenue
Supplies
Supplies Expense
17,000
12,000
34,000
3,000
135,000
4,000
6,000
Instructions
(a) Net income = $42,000: ($135,000 – $21,000 – $12,000 – $3,000 – $17,000 – $34,000 – $6,000)
(b)
Retained Earnings, January 1
Add: Net Income
Less: Dividends
Retained Earnings, December 31
$12,000
42,000
54,000
15,000
$39,000
(c)
TRACY COMPANY
Balance Sheet
December 31, 2012
___________________________________________________________________________
Assets
Current assets
Cash .................................................................................... $ 24,000
Accounts receivable .............................................................
11,000
Supplies ...............................................................................
4,000
Prepaid insurance ................................................................
6,000
Total current assets ......................................................
Property, plant, and equipment
Equipment ........................................................................... $210,000
Less: Accumulated depreciation—equipment ......................
38,000
Total assets ..................................................................
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ................................................................ $ 15,000
Salaries payable ..................................................................
3,000
Total current liabilities ...................................................
Long-term liabilities
Note payable .......................................................................
Total liabilities ...............................................................
Stockholders’ equity
Common stock...................................................................... $90,000
Retained earnings ...............................................................
39,000
Total liabilities and stockholders’ equity ........................
(d)
Current ratio: $45,000 ÷ $18,000 = 2.5:1
Debt to total assets ratio: $88,000 ÷ $217,000 = 40.6%
Earnings per share: $42,000 ÷ 10,000= $4.20
45,000
172,000
$217,000
18,000
70,000
88,000
129,000
$217,000
Chapter 3
54.If total liabilities increased by $5,000, then
a. assets must have decreased by $5,000.
b. stockholders’ equity must have increased by $5,000.
c. assets must have increased by $5,000, or stockholders’ equity must have decreased by $5,000.
d. assets and stockholders’ equity each increased by $2,500.
56.
60.
Collection of a $600 Accounts Receivable
a. increases an asset $600; decreases an asset $600.
b. increases an asset $600; decreases a liability $600.
c. decreases a liability $600; increases stockholders’ equity $600.
d. decreases an asset $600; decreases a liability $600.
If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. stockholders’ equity will increase.
d. assets will decrease.
68.A paid dividend
a. decreases assets and stockholders’ equity.
b. increases assets and stockholders’ equity.
c. increases assets and decreases stockholders’ equity.
d. decreases assets and increases stockholders’ equity.
75.
Courtney Company purchased equipment for $1,800 cash. As a result of this event,
a. equity decreased by $1,800.
b. assets increased by $1,800.
c. assets remained unchanged.
d. Both a and b.
84.Jamal Company began the year with $64,000 in its Common Stock account and a debit balance in Retained
Earnings of $36,000. During the year, the company earned net income of $18,000 and declared and
paid $6,000 of dividends. In addition, the company sold additional common stock amounting to
$22,000. Based on this information, what should the transaction analysis show for the ending total of all
stockholders' equity accounts?
a. $134,000
b. $146,000
c. $62,000
d. $90,000
113.
An accountant has debited an asset account for $900 and credited a liability account for $500. What
can be done to complete the recording of the transaction?
a Debit a stockholders’ equity account for $400.
b. Debit another asset account for $400.
c. Credit a different asset account for $400.
d. Nothing further must be done.
141.
Barnes Company showed the following balances at the end of its first year:
Cash
$11,000
Prepaid insurance
700
Accounts receivable
Accounts payable
Notes payable
Common stock
Dividends
Revenues
Expenses
3,500
2,800
4,200
5,400
700
21,000
17,500
What did Barnes Company show as total credits on its trial balance?
a. $34,100
b. $33,400
c. $32,700
d. $34,800
Be. 221
For each item below, indicate whether a debit or credit applies.
1. Increase in Accounts Payable
____Cr.__
2.
3.
4.
5.
____Dr.__
____Cr.__
____Dr.__
____Dr.__
Increase in Accounts Receivable
Increase in Retained earnings
Decrease in Unearned Service Revenue
Decrease in Interest Payable
Be. 223
Journalize the following business transactions in general journal form. Identify each transaction by number.
You may omit explanations of the transaction.
1. Owner invested $50,000 in exchange for common stock of the corporation.
2. Hires an employee to be paid $400 per week, starting tomorrow.
3. Paid two years’ rent in advance, $7,200.
4. Paid the worker’s weekly wage.
5. Recorded service revenue earned and received for the week, $1,500.
1.Cash
......................................................................................... 50,000
Common Stock .................................................................
2.
No entry
3.
Prepaid Rent ............................................................................
Cash.................................................................................
7,200
Salaries and Wages Expense ...................................................
Cash.................................................................................
400
Cash .........................................................................................
Service Revenue ..............................................................
1,500
4.
5.
50,000
7,200
400
1,500
Be. 227
The transactions of the Stormont Store are recorded in the general journal below. You are to post the journal
entries to T accounts and compute the August 31 balances.
General Journal
____________________________________________________________________________
Date
Account Titles and Explanation
Debit
Credit
____________________________________________________________________________
2012
Aug. 5
Accounts Receivable
2,800
Service Revenue
2,800
10
Cash
3,000
Service Revenue
3,000
19
Rent Expense
1,000
Cash
1,000
25
Cash
1,400
Accounts Receivable
1,400
General Ledger
Cash
8/10
8/25
3,000
1,400
8/31 Bal.
3,400
Accounts Receivable
8/19
1,000
8/5
2,800
8/31 Bal.
1,400
Service Revenue
8/5
8/10
8/31 Bal.
8/25
Rent Expense
2,800
3,000
5,800
8/19
1,000
8/31 Bal.
1,000
1,400
Chapter 4
54.The periodicity assumption states that:
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise's accounts can only be made in the time period when the business
terminates its operations.
d. the economic life of a business can be divided into artificial time periods.
64.Otto’s Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The
customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto
receives the check in the mail on September 6. When should Otto show that the revenue was earned?
a. August 31
b. August 1
c. September 5
d. September 6
69.
A furniture factory's employees work overtime to finish an order that is sold on January 31. The office
sends a statement to the customer in early February and payment is received by mid-February. The
overtime wages should be expensed in:
a. January.
b. February.
c. the period when the workers receive their checks.
d. either January or February depending on when the pay period ends.
99.Adjusting entries are required:
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company's profits are below the budget.
c. when expenses are recorded in the period in which they are earned.
d. None of the above.
105. An asset–expense relationship exists with:
a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.
159.
The policy at Adler Corporation is to expense all office supplies at the time of purchase. On the last
day of the accounting period, there are $1,400 of unused office supplies on hand and the balance of
supplies expense is $3,500. What should the accountant do?
a. Debit Supplies and credit Supplies Expense for $1,400.
b. Nothing, company policy says to expense supplies when purchased.
c. Convince management to change its policy to avoid problems in the future.
d. Debit Supplies Expense for $2,100 and credit Supplies for $2,100.
163.
Masterfalls Corporation purchased a one-year insurance policy in January 2010 for $60,000. The
insurance policy is in effect from March 2010 through February 2011. If the company neglects to make
the proper year-end adjustment for the expired insurance:
a. net income and assets will be understated by $50,000
b. net income and assets will be overstated by $50,000
c. net income and assets will be understated by $10,000
d. net income and assets will be overstated by $10,000
180.
Raxon Company borrowed $30,000 from the bank signing a 6%, 3-month note on September 1.
Principal and interest are payable to the bank on December 1. If the company prepares monthly
financial statements, the adjusting entry that the company should make for interest on September 30,
would be:
a. debit Interest Expense, $1,800; credit Interest Payable, $1,800.
b. debit Interest Expense, $150; credit Interest Payable, $150.
c. debit Note Payable, $1,800; credit Cash, $1,800.
d. debit Cash, $450; credit Interest Payable, $450.
184.
Amos Real Estate signed a four-month note payable in the amount of $12,000 on September 1. The
note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of
September is:
a. $360.
b. $90.
c. $1,080.
d. $120.
186.
A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas
shopping season. The note is signed on November 1 in the amount of $40,000 with annual interest of
6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that
date, if no entries have been made previously for the interest?
a. Interest Expense
400
Interest Payable
400
b. Interest Expense
600
Interest Payable
600
c. Interest Expense
400
Cash
400
d. Interest Expense
600
Note Payable
600
203.
Based on the account balances below, what is the total of the debit and credit columns of the adjusted
trial balance?
Service revenue
$3,300
Equipment
$6,400
Cash
1,525
Prepaid insurance
1,225
Unearned revenue
5,320
Depreciation expense
640
Salary expense
1,050
Accum. depreciation
1,280
Common stock
390
Retained earnings
550
a. $9,150
b. $10,840
c. $9,560
d. $10,430
Be. 243
Better Publications, sold annual subscriptions to their magazine for $36,000 in December, 2010. The magazine
is published monthly. The new subscribers received their first magazine in January, 2011.
1.
2.
1.
2.
What adjusting entry should be made in January if the subscriptions were originally recorded as a
liability?
What amount will be reported on the January 2011 balance sheet for Unearned Revenue?
Unearned Subscription Revenue
3,000
Subscription Revenue
3,000
Unearned Subscription Revenue at January 31: 36,000 - 3,000 = $33,000
Be. 244
River Ridge Music School borrowed $30,000 from the bank signing a 10%, 6-month note on November 1.
Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements,
what adjusting entry should the company make at November 30 with regard to the note (round answer to the
nearest dollar)?
Interest Expense (30,000  10%  1/12)
250
Interest Payable
250
Ex. 260
A review of the ledger of Wilde Insurance Co. at December 31, 2011, produces the following data pertaining to
the preparation of annual adjusting entries:
(a) Salaries Payable $0: Salaries are paid every Friday for the current week. Five employees receive a weekly
salary of $800, and three employees earn a weekly salary of $600. December 31 is a Tuesday.
Employees do not work weekends. All employees worked the last 2 days of December.
(b) Unearned Insurance Revenue $58,000: The company sold several insurance policies during the year as
shown below:
Premium
Term
Per
Number of
Date
(in months)
Policy
Policies
Oct. 1
12
$ 8,000
3
Dec. 1
12
18,000
2
(c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2011, with an 8% interest rate.
Instructions:
Prepare the adjusting entries at December 31, 2011. Show all computations.
(a)
(b)
(c)
Dec. 31 Salaries Expense
Salaries Payable
(5 X $800 X 2/5 = $$1,600)
(3 X $600 X 2/5 = $ 720)
31 Unearned Insurance Revenue
Insurance Revenue
(3/12 X $8,000 X 3 = $6,000)
(1/12 X $18,000 X 2 = $3,000)
2,320
2,320
9,000
31 Interest Revenue
1,200
Interest Receivable
($90,000 X .08 X 2/12 = $1,200)
9,000
1,200
Chapter 5
57. Gross profit equals the difference between
a. net income and operating expenses.
b. net sales revenues and cost of goods sold.
c. net sales revenues and operating expenses.
d. net sales revenues and cost of goods sold plus operating expenses.
62.Two categories of expenses in merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
71.
A perpetual inventory system would most likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
86.
A company using a perpetual inventory system that returns goods previously purchased on credit would
a. debit Accounts Payable and credit Inventory.
b. debit Sales and credit Accounts Payable.
c. debit Cash and credit Accounts Payable.
d. debit Accounts Payable and credit Purchases.
89.
Conway Company purchased merchandise inventory with an invoice price of $8,000 and credit terms of
2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period?
a. $8,000
b. $7,840
c. $7,200
d. $7,360
Tony’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $30,000, terms 2/10, n/30.
Returned $600 of the shipment for credit.
Paid $150 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $28,812.
b. increased by $29,550.
c. increased by $28,959.
d. increased by $28,962.
102.
112.
The entry to record a sale of $900 with terms of 2/10, n/30 will include a
a. debit to Sales Discounts for $18.
b. debit to Sales Revenue for $882.
c. credit to Accounts Receivable for $900.
d. credit to Sales Revenue for $900.
127.
Anderson Inc. sells $600 of merchandise on account to Baltic Company with credit terms of 2/10, n/30.
If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic
Company's check?
a.
b.
c.
d.
132.
$588
$600
$540
$560
Piper Company sells merchandise on account for $1,800 to Morton Company with credit terms of 2/10,
n/30. Morton Company returns $600 of merchandise that was damaged, along with a check to settle
the account within the discount period. What entry does Piper Company make upon receipt of the
check?
a. Cash
1,200
Accounts Receivable
1,200
b. Cash
Sales Returns and Allowances
Accounts Receivable .
1,176
624
c. Cash
Sales Returns and Allowances
Sales Discounts
Accounts Receivable
1,176
600
24
1,800
d. Cash
1,764
Sales Discounts
36
Sales Returns and Allowances
Accounts Receivable
1,800
600
1,200
161.
Financial information is presented below:
Operating Expenses
$ 45,000
Sales Revenue
150,000
Cost of Goods Sold
90,000
The gross profit rate would be
a. .60.
b. .10
c. .30.
d. .40.
165.
Financial information is presented below:
Operating Expenses
$ 21,000
Sales Returns and Allowances
7,000
Sales Discounts
3,000
Sales Revenue
150,000
Cost of Goods Sold
105,000
The profit margin ratio would be
a. .16.
b. .14.
c. .09.
d. .10.
180.
During the year, Megan’s Pet Shop’s merchandise inventory decreased by $20,000. If the company’s
cost of goods sold for the year was $300,000, purchases would have been
a. $320,000.
b. $280,000.
c. $260,000.
d. Unable to determine.
200.
Betty’s Fabrics sold merchandise for $76,000 cash during the month of July. Returns that month totaled
$1,600. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost
of goods sold of:
a. $76,000 and $45,600.
b. $74,400 and $29,760.
c. $74,400 and $44,640.
d. $76,000 and $44,640.
Be. 207
Presented here are the components in Rowland Company’s income statement. Determine the missing
amounts.
_Sales_
$75,000
(c)
a.
b.
c.
d.
Cost of
Goods Sold
(a)
$56,000
Gross
_Profit
$30,000
$54,000
Operating
Expenses
(b)
$48,000
Net
Income
$17,000
(d)
$ 45,000
$ 13,000
$110,000
$ 6,000
Be. 208
On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company. The selling
price of the goods is $600 and the cost of goods is $400. Both companies use the perpetual inventory systems
Journalize the transactions on the books of both companies.
Roberta’s Knickknacks records
Sept. 4
Inventory ............................................................................
Accounts Payable ......................................................
600
600
Dolan Company records
Sept. 4
Accounts Receivable ..........................................................
Sales .........................................................................
600
Cost of Goods Sold ............................................................
Inventory ....................................................................
400
600
400
Be. 210
Prepare the journal entries to record the following transactions on Markowitz Company’s books using a
perpetual inventory system. On February 6, Markowitz Company sold $75,000 of merchandise to the Lyman
Company, terms 2/10, net /30. The cost of the merchandise sold was $50,000. On February 8, the Lyman
Company returned $10,000 of the merchandise purchased on February 6. The cost of the merchandise
returned was $5,000. On February 16 Markowitz Company received the balance due from the Lyman
Company.
Feb 6
Accounts Receivable ..........................................................
75,000
Sales Revenue ...........................................................
75,000
Feb 8
Feb 16
Cost of Goods Sold ............................................................
Inventory ....................................................................
50,000
Sales Returns and Allowances ...........................................
Accounts Receivable .................................................
10,000
Inventory ............................................................................
Cost of Goods Sold ...................................................
5,000
Cash ($65,000 x .98) ..........................................................
Sales Discounts .................................................................
Accounts Receivable ($75,000 – $10,000) ................
63,700
1,300
50,000
10,000
5,000
65,000
Ex. 216
This information relates to Sherper Co.
1.
2.
3.
4.
5.
On April 5 purchased merchandise from Newport Company for $20,000, terms 2/10, n/10.
On April 6 paid freight costs of $900 on merchandise purchased from Newport.
On April 7 purchased equipment on account for $26,000.
On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000.
On April 15 paid the amount due to Newport Company in full.
Instructions
(a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co. Sherper
Co. uses a perpetual inventory system.
(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15.
Prepare the journal entry to record this payment.
(a) (1) April 5
Inventory ......................................................
20,000
Accounts Payable .................................
20,000
(2)
(3)
(4)
(5)
April 6
April 7
April 8
April 15
Inventory ......................................................
Cash .....................................................
900
Equipment....................................................
Accounts Payable .................................
26,000
Accounts Payable ........................................
Inventory...............................................
2,000
Accounts Payable
($20,000 – $2,000) ..................................
Inventory
[($20,000 – $2,000)  2%]...................
900
26,000
2,000
18,000
360
Cash ($17,000 – $340) ...........................
(b)
May 4
Accounts Payable ($20,000 – $2,000).................
Cash ...........................................................
17,640
18,000
18,000
Chapter 6
47.If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.
53.
Tidwell Company's goods in transit at December 31 include sales made
(1) FOB destination
(2) FOB shipping point
and purchases made
(3) FOB destination
(4) FOB shipping point.
Which items should be included in Tidwell's inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)
60.
At December 31, 2012 Mohling Company’s inventory records indicated a balance of $652,000. Upon
further investigation it was determined that this amount included the following:
 $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/12 terms FOB
destination, but not due to be received until January 2nd
 $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not
expected to reach their destination until January 6th.
 $6,000 of goods received on consignment from Dollywood Company
What is Mohling’s correct ending inventory balance at December 31, 2012?
a. $540,000
b. $646,000
c. $460,000
d. $534,000
66.
Alpha First Company just began business and made the following four inventory purchases in June:
June 1
150 units
$ 780
June 10
200 units
1,170
June 15
200 units
1,260
June 28
150 units
990
$4,200
A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using
the LIFO inventory method, the value of the ending inventory on June 30 is
a. $1,300
b. $1,365
c. $1,650
67.
d. $1,620
Baker Bakery Company just began business and made the following four inventory purchases in June:
June 1
150 units
$ 780
June 10
200 units
1,170
June 15
200 units
1,260
June 28
150 units
990
$4,200
A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using
the FIFO inventory method, the amount allocated to ending inventory for June is
a. $1,300
b. $1,365
c. $1,620
d. $1,650
68.
Charlene Cosmetics Company just began business and made the following four inventory purchases in
June:
June 1
150 units
$ 780
June 10
200 units
1,170
June 15
200 units
1,260
June 28
150 units
990
$4,200
A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using
the average cost method, the amount allocated to the ending inventory on June 30 is
a. $1,463.
b. $1,620.
c. $1,575.
d. $1,500.
103.
Carryable CDs has the following inventory data:
Nov. 1
Inventory
30 units @ $8.00 each
8
Purchase
120 units @ $8.60 each
17
Purchase
60 units @ $8.40 each
25
Purchase
90 units @ $8.80 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand.
Cost of goods sold under LIFO is
a. $876
b. $1,692
c. $842
d. $1,726
108.
Hogan Industries had the following inventory transactions occur during 2012:
Units
Cost/unit
Feb. 1, 2012
Purchase
18
$45
Mar. 14, 2012
Purchase
31
$47
May 1, 2012
Purchase
22
$49
The company sold 51 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory
system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)
a. $2,441
b. $2,365
c. $848
d. $772
154.
Use the following information regarding Black Company and Red Company to answer the question
“Which amount is equal to Red Company's "days in inventory" for 2011 (to the closest decimal place)?”
Black Company
Red Company
a.
b.
c.
d.
162.
Year
2010
2011
2012
2010
2011
2012
Inventory
Turnover Ratio
10.7
10.2
Ending Inventory
$26,340
$29,890
$30,100
8.8
9.5
$25,860
$24,750
$22,530
67.8 days
38.4 days
28.1 days
41.5 days
The following information was available for Camara Company at December 31, 2012: beginning
inventory $80,000; ending inventory $120,000; cost of goods sold $840,000; and sales $1,200,000.
Camara’s inventory turnover ratio in 2012 was
a. 12.0 times.
b. 10.0 times.
c. 8.4 times.
d. 7.0 times.
Ex. 202
Grother Company uses the periodic inventory method and had the following inventory information available:
Units
Unit Cost
Total Cost
1/1
Beginning Inventory
100
$4
$ 400
1/20
Purchase
500
$5
2,500
7/25
Purchase
100
$7
700
10/20 Purchase
300
$8
2,400
1,000
$6,000
A physical count of inventory on December 31 revealed that there were 325 units on hand.
Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is
$__________.
2. Assume that the company uses the average cost method. The value of the ending inventory on December
31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is
$__________.
4. Determine the difference in the amount of income that the company would have reported if it had used the
FIFO method instead of the LIFO method. Would income have been greater or less?
1. FIFO: Ending inventory $2,575
300 units @$8
=
$2,400
25 units @$7
=
175
325 units
$2,575
2. Average Cost: Ending inventory $1,950
$6,000  1,000 = $6.00 per unit  325 units = $1,950
3. LIFO: Ending Inventory $1,525
100 units @$4
=
$ 400
225 units @$5
=
1,125
325 units
$1,525
4. FIFO: Cost of goods sold $3,425
100 units @$4
=
$ 400
500 units @$5
=
2,500
75 units @$7
=
525
675 units
$3,425
LIFO: Cost of goods sold $4,475
300 units @$8
$2,400
100 units @$7
700
275 units @$5
1,375
675 units
$4,475
Income would have been $1,050; ($4,475 vs. $3,425) greater if the company used FIFO instead of LIFO.
Chapter 8
67.
Wilton sells softball equipment. On November 14, they shipped $2,000 worth of softball uniforms to
Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High
School for $1,200 worth of custom printed bats to be produced in December. On November 30, Paola
Middle School returned $200 of defective merchandise. Wilton has received no payments from either
school as of month end. What amount will be recognized as net accounts receivable on the balance
sheet as of November 30?
a. $3,200
b. $3,000
c. $2,000
d. $1,800
71.Carson Company on July 15 sells merchandise on account to Tayler Co. for $1,500, terms 2/10, n/30. On
July 20 Tayler Co. returns merchandise worth $600 to Carson Company. On July 24 payment is
received from Tayler Co. for the balance due. What is the amount of cash received?
a. $900
b. $882
c. $870
d. $1,500
86.
An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If
Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for
the period will require a
a. debit to Bad Debts Expense for $4,000.
b. debit to Allowance for Doubtful Accounts for $2,800.
c. debit to Bad Debts Expense for $2,800.
d. credit to Allowance for Doubtful Accounts for $4,000.
87.
An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If
Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the
period will require a
a. debit to Bad Debts Expense for $4,000.
b. debit to Bad Debt Expense for $5,600.
c. debit to Bad Debts Expense for $2,400.
d. credit to Allowance for Doubtful Accounts for $5,000.
72.
The Allowance for Doubtful Accounts is necessary because
a. when recording uncollectible accounts expense, it is not possible to know which specific accounts
will not pay.
b. uncollectible accounts that are written off must be accumulated in a separate account.
c. a liability results when a credit sale is made.
d. management needs to accumulate all the credit losses over the years.
78.If a company fails to record estimated bad debts expense,
a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.
124.
Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.
c. balance sheet relationships are emphasized.
d. bad debt expense is always recorded in the period in which the revenue was recorded.
145.
The interest on a $4,000, 10%, 1-year note receivable is
a. $4,000.
b. $400.
c. $4,400.
d. $4,040.
147.
The interest on a $4,000, 6%, 90-day note receivable is
a. $240.
b. $120
c. $60.
d. $180.
154.
Rosen Company receives a $3,000, 3-month, 6% promissory note from Bay Company in settlement of
an open accounts receivable. What entry will Rosen Company make upon receiving the note?
a. Notes Receivable
3,045
Accounts Receivable—Bay Company
3,045
b. Notes Receivable
3,045
Accounts Receivable—Bay Company
3,000
Interest Revenue
45
c. Notes Receivable
3,000
Interest Receivable
45
Accounts Receivable—Bay Company
Interest Revenue
d. Notes Receivable
3,000
Accounts Receivable—Bay Company
3,000
45
3,000
157.
A 90-day note dated April 30, 2012, would mature on:
a. July 30, 2012.
b. July 29, 2012.
c. July 31, 2012.
d. August 1, 2012.
181.
The financial statements of the Nelson Manufacturing Company reports net sales of $400,000 and
accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively.
What is the receivables turnover ratio for Nelson?
a. 5.6 times
b. 8 times
c. 13.3 times
d. 10.0 times
197.
A company sells $800,000 of accounts receivable to a factor for cash less a 2% service charge. The
entry to record the sale should not include a
a. debit to Interest Expense for $16,000.
b. debit to Cash for $784,000.
c. debit to Service Charge Expense for $16,000.
d. credit to Accounts Receivable for $800,000.
205.
Gipson Furniture factors $400,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 3%
service charge on the amount of receivables sold. Gipson Furniture factors its receivables regularly with
Kwik Factors. What journal entry does Gipson make when factoring these receivables?
a. Cash
388,000
Loss on Sale of Receivables
12,000
Accounts Receivable
400,000
b. Cash
388,000
Accounts Receivable
388,000
c. Cash
400,000
Accounts Receivable
388,000
Gain on Sale of Receivables
12,000
d. Cash
388,000
Service Charge Expense
12,000
Accounts Receivable
400,000
208.
Schofield Retailers accepted $50,000 of Silver Bank MasterCard credit card charges for merchandise
sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by
Schofield Retailers will include a credit to Sales of $50,000 and a debit(s) to
a. Cash for $48,000 and Service Charge Expense for $2,000.
b. Accounts receivable for $48,000 and Service Charge Expense for $2,000.
c. Cash for $50,000.
d. Accounts Receivable for $50,000.
Be. 212
The following are sales of The Holiday Store during February. The Store sells seasonal holiday items.
2/3
2/8
2/10
2/14
2/27
2/28
Sold 50 heart balloons for $5 cash each.
Sold 100 boxes of chocolates at $10 each, terms 2/10, n/30. Collected within the
discount period.
Sold 50 heart necklaces for $25 each with no discount. Have not collected as of month end.
Sold 100 bouquets of roses at $30 per bouquet. Half the sales were on account. By month end, 75%
were paid off.
Sold 25 leftover heart necklaces to a discount store for $15 each on credit.
Sold a display cabinet at a swap meet for $100 on account.
Determine the balance in Accounts Receivable at 2/28.
2/10 50 necklaces  $25
2/14 50 bouquets (½  100 bouquets)  $30  25%
2/27 25 necklaces  $15
Total Accounts Receivable
$1,250
375
375
$2,000
Note: The receivable from the sale of the display cabinet should be included as an other receivable.
Be. 213
Prepare journal entries to record the following transactions entered into by the Castagno Company:
2012
Nov. 1
Sold merchandise on account to Mercer, Inc., for $15,000, terms 2/10, n/30.
Nov.
5
Mercer, Inc., returned merchandise worth $1,000.
Nov.
9
Received payment in full from Mercer, Inc.
2012
Nov. 1
Nov.
Nov.
5
9
Accounts Receivable—Mercer, Inc. ....................................
Sales .........................................................................
15,000
Sales Returns and Allowances ...........................................
Accounts Receivable—Mercer, Inc. ...........................
1,000
Cash ................................................................................
Sales Discounts ($14,000  .02) ........................................
Accounts Receivable—Mercer, Inc. ...........................
13,720
280
15,000
1,000
14,000
Chapter 9
46. A company purchased land for $210,000 cash. Real estate brokers' commission was $15,000 and
$21,000 was spent for demolishing an old building on the land before construction of a new building
could start. Under the cost principle, the cost of land would be recorded at
a. $231,000.
b. $210,000.
c. $225,000.
d. $246,000.
59.Givens Retail purchased land for a new parking lot for $50,000. The paving cost $70,000 and the lights to
illuminate the new parking area cost $24,000. Which of the following statements is true with respect to
these additions?
a. $120,000 should be debited to the Land account.
b. $94,000 should be debited to Land Improvements.
c. $144,000 should be debited to the Land account.
d. $144,000 should be debited to Land Improvements.
60.
Shaffer Company acquires land for $56,000 cash. Additional costs are as follows.
Removal of shed
$ 300
Filling and grading
1,500
Salvage value of lumber of shed
120
Broker commission
1,130
Paving of parking lot
10,000
Closing costs
560
Shaffer will record the acquisition cost of the land as
a. $56,000.
b. $57,690.
c. $59,610.
d. $59,370.
66.
Arnold Company purchases a new delivery truck for $45,000. The sales taxes are $2,500. The logo of
the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck
undergoes safety testing for $220. What does Arnold record as the cost of the new truck?
a. $49,040.
b. $48,920.
c. $47,500.
d. $46,920.
91.
Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of
$8,000 for building a foundation and installing the equipment. It is estimated that the equipment will
have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using
the straight-line method will be
a. $14,160.
b. $11,760.
c. $9,840.
d. $9,600.
93.Equipment with a cost of $256,000 has an estimated salvage value of $24,000 and an estimated life of 4
years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used 3,300 hours?
a. $64,000.
b. $70,000.
c. $66,000.
d. $58,000.
96.
A machine was purchased for $18,000 and it was estimated to have a $3,000 salvage value at the end
of its useful life. Monthly depreciation expense of $250 was recorded using the straight-line method.
The annual depreciation rate is
a. 25%.
b. 2%.
c. 16%.
d. 20%.
115.
Mitchell Corporation bought equipment on January 1, 2012 .The equipment cost $120,000 and had an
expected salvage value of $20,000. The life of the equipment was estimated to be 6 years. The book
value of the equipment at the beginning of the third year would be
a. $120,000.
b. $100,000.
c. $86,667.
d. $33,333.
143.
In 2012, Blanchard Corporation has plant equipment that originally cost $75,000 and has accumulated
depreciation of $30,000. A new processing technique has rendered the equipment obsolete, so it is
retired. Which of the following entries should Blanchard use to record the retirement of the equipment?
a. Loss on Disposal of Plant Assets
45,000
Equipment
45,000
b. Accumulated Depreciation – Equipment
30,000
Loss on Disposal of Plant Assets
45,000
Equipment
75,000
c. Loss on Disposal of Plant Assets
45,000
Accumulated Depreciation – Equipment
45,000
d. Plant Equipment
75,000
Accumulated Depreciation – Equipment
30,000
Loss on Disposal of Plant Assets
45,000
157.
On July 1, 2012, Dillman Kennels sells equipment for $44,000. The equipment originally cost $120,000,
had an estimated 5-year life and an expected salvage value of $20,000. The Accumulated Depreciation
account had a balance of $70,000 on January 1, 2012, using the straight-line method. The gain or loss
on disposal is
a. $6,000 gain.
b. $4,000 loss.
c. $6,000 loss.
d. $4,000 gain.
166.
The following information is provided for Nguyen Company and Northwest Corporation.
(in $ millions)
Nguyen Company
Northwest Corporation
Net income 2012
$275
$390
Net sales 2012
1,500
4,100
Total assets 12/31/10
1,000
2,400
Total assets 12/31/11
1,050
3,000
Total assets 12/31/12
1,150
4,000
What is Nguyen's return on assets for 2012?
a. 400%
b. 136%
c. 25%
d. 73%
168.
The following information is provided for Nguyen Company and Northwest Corporation.
(in $ millions)
Nguyen Company
Northwest Corporation
Net income 2012
$275
$390
Net sales 2012
1,500
4,100
Total assets 12/31/10
1,000
2,400
Total assets 12/31/11
1,050
3,000
Total assets 12/31/12
1,150
4,000
What is Nguyen's asset turnover ratio for 2012?
a. 4.00 times
b. 1.36 times
c. 0.25 times
d. 0.73 times