1
Accounting 303
Exam 1, Chapters 1 – 3 & 5
Fall 2011
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 52 points in total) Read each question carefully and indicate
your answer by circling the letter preceding the one best answer.
1.
What is due process in the context of standard setting at the FASB?
a.
FASB operates in full view of the public.
b.
Public hearings are held on proposed accounting standards.
c.
Interested parties can make their views known.
d.
All of the above.
2.
Which organization was responsible for issuing Accounting Research Bulletins?
a.
Accounting Principles Board.
b.
Committee on Accounting Procedure.
c.
SEC.
d.
FASB.
3.
Which of the following is a characteristic of generally accepted accounting principles?
a.
common set of standards and principles.
b.
standards and principles are based on federal statutes.
c.
acceptance requires an affirmative vote of Certified Public Accountants.
d.
practices that become accepted for at least a year by all industry members.
4.
The Financial Accounting Standards Board
a.
has issued a series of pronouncements entitled Statements on Auditing Standards.
b.
is appointed by the Financial Accounting Foundation.
c.
is the arm of the Securities and Exchange Commission responsible for setting financial accounting
standards.
d.
was the forerunner of the current Accounting Principles Board.
5.
Which of the following pronouncements were issued by the Accounting Principles Board?
a.
Accounting Research Bulletins
b.
Opinions
c.
Statements of Position
d.
Statements of Financial Accounting
6.
According to the FASB's conceptual framework, which of the following relates to both relevance and
faithful representation?
a.
b.
c.
d.
Comparability
Yes
Yes
No
No
Neutrality
Yes
No
Yes
No
2
7.
The underlying theme of the conceptual framework is
a.
decision usefulness.
b.
understandability.
c.
faithful representation.
d.
comparability.
8.
Which of the following is an ingredient of relevance?
a.
Verifiability.
b.
Neutrality.
c.
Timeliness.
d.
Materiality.
9.
Which of the following is an ingredient of faithful representation?
a.
Predictive value.
b.
Materiality.
c.
Neutrality.
d.
Confirmatory value.
10.
What is the quality of information that enables users to better forecast future operations?
a.
Faithful representation.
b.
Materiality.
c.
Timeliness.
d.
Relevance.
11.
The characteristic that is demonstrated when a high degree of consensus can be secured among
independent measurers using the same measurement methods is
a.
relevance.
b.
faithful representation.
c.
verifiability.
d.
neutrality.
12.
In classifying the elements of financial statements, the primary distinction between revenues and gains is
a.
the materiality of the amounts involved.
b.
the likelihood that the transactions involved will recur in the future.
c.
the nature of the activities that gave rise to the transactions involved.
d.
the costs versus the benefits of the alternative methods of disclosing the transactions involved.
13.
The economic entity assumption
a.
does not apply to sole proprietorships.
b.
recognizes the legal aspects of business organizations.
c.
is applicable to all forms of business organizations.
d.
requires periodic income measurement.
14.
What accounting concept justifies the usage of depreciation and amortization policies?
a.
Going concern assumption
b.
Fair value principle
c.
Full disclosure principle
d.
Monetary unit assumption
3
15.
Which of the following errors will cause an imbalance in the trial balance?
a.
Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable.
b.
Listing the balance of an account with a debit balance in the credit column of the trial balance.
c.
Omission of a transaction in the journal.
d.
Posting an entire journal entry twice to the ledger.
16.
The failure to properly record an adjusting entry to accrue a revenue item will result in an:
a.
understatement of revenues and an understatement of liabilities.
b.
understatement of revenues and an understatement of assets.
c.
overstatement of revenues and an overstatement of liabilities.
d.
overstatement of revenues and an overstatement of assets.
17.
Olsen Company paid or collected during 2012 the following items:
Insurance premiums paid
Interest collected
Salaries paid
$ 20,800
67,800
240,400
The following balances have been excerpted from Olsen's balance sheets:
Prepaid insurance
Interest receivable
Salaries and wages payable
December 31, 2012
$ 2,400
7,400
24,600
December 31, 2011
$ 3,000
5,800
21,200
Insurance expense on the income statement for 2012 should be
a. $15,400.
b. $20,200.
c. $21,400.
d. $26,200.
18.
Lopez Company received $9,600 on April 1, 2012 for one year's rent in advance and recorded the
transaction with a credit to an income statement account. The December 31, 2012 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $2,400.
b. debit Rent Revenue and credit Unearned Rent Revenue, $7,200.
c. debit Unearned Rent Revenue and credit Rent Revenue, $2,400.
d. debit Unearned Rent Revenue and credit Rent Revenue, $7,200.
4
19.
Presented below are data for Bangkok Corp.
2012
Assets, January 1
Liabilities, January 1
Stockholders' Equity, Jan. 1
Dividends
Common Stock
Stockholders' Equity, Dec. 31
Net Income
2013
$5,400
3,240
?
1,080
972
?
1,280
$6,480
?
?
810
864
?
864
Stockholders' Equity at January 1, 2013 is
a. $3,332.
b. $2,160.
c. $2,360.
d. $3,440.
20.
Stine Corp.'s trial balance reflected the following account balances at December 31, 2012:
Accounts receivable (net)
Trading securities
Accumulated depreciation on
equipment and furniture
Cash
Inventory
Equipment
Patent
Prepaid expenses
Land held for future business site
$24,000
6,000
15,000
16,000
30,000
25,000
4,000
2,000
18,000
On Stine's December 31, 2012 balance sheet, the current assets total is
a. $78,000.
b. $82,000.
c. $87,000.
d. $95,000.
21.
In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive
assets should generally be classified as cash inflows from
a.
operating activities.
b.
financing activities.
c.
investing activities.
d.
selling activities.
5
22.
In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash
outflows for
a.
operating activities.
b.
borrowing activities.
c.
lending activities.
d.
financing activities.
23.
In a statement of cash flows, proceeds from issuing common stock should be classified as cash inflows
from
a.
lending activities.
b.
operating activities.
c.
investing activities.
d.
financing activities.
24.
Which of the following is not an acceptable major asset classification on a balance sheet?
a.
Current assets
b.
Long-term investments
c.
Property, plant, and equipment
d.
Deferred charges
25.
Koehler Company owns the following investments:
Trading securities (fair value)
Available-for-sale securities (fair value)
Held-to-maturity securities (amortized cost)
$120,000
70,000
94,000
Koehler will report securities in its long-term investments section of
a.
exactly $190,000.
b.
exactly $214,000.
c.
exactly $284,000.
d.
$164,000 or an amount less than $164,000, depending on the circumstances.
26.
The balance sheet is useful for analyzing all of the following except
a.
liquidity.
b.
solvency.
c.
profitability.
d.
financial flexibility.
6
II. Problems – (48 points in total)
1.
(9 points) Match the letter preceding the organizations’ names or the basic accounting concepts with the
descriptions listed below by placing the appropriate letter in the space provided.
NOTE: Each letter may be used once, more than once, or not at all.
A
B
C
D
E
F
G
H
I
J
Accounting Principles Board
American Accounting Association
American Institute of CPAs
Committee on Accounting Procedure
Emerging Issues Task Force
Financial Accounting Foundation
Financial Accounting Standards Boards
Governmental Acct Standards Board
Internal Revenue Service
International Acct Standards Board
K
L
M
N
O
P
Q
R
S
Conservatism convention
Economic Entity assumption
Going Concern Assumption
Historical Cost Principle
Matching Principle
Monetary-unit assumption
Periodicity Assumption
Revenue Recognition Principle
Securities and Exchange Commission
___ a. This was the first organization in the U.S. to be given authority to issue pronouncements on accounting
procedures and practice. They issued 51 Bulletins during their 21 year existence.
___ b. This organization began over 100 years ago, prepares the Uniform CPA Exam, and was the parent
organization of the CAP.
___ c. This organization has the most legal authority to establish accounting standards in the U.S.
___ d. This is the organization that has the current authority to establish GAAP for U.S. businesses.
___ e. In the absence of evidence to the contrary, it is assumed that a business will continue into the future.
___ f. Traditionally, the dollar has been treated by accountants as a stable monetary unit, and thus is used as the
measuring unit for financial statements.
___ g. A business's resources, transactions, and financial records are kept separate from those of its owners for
accounting purposes.
___ h. The cost of merchandise inventory is charged to cost of goods sold in the same period that the sale is
recorded.
___ i. Financial information should be separated into specific time periods for reporting purposes to make the
information more useful.
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2.
(15 points) Presented below are several transactions ITS Systems, Inc. entered into during 2011. For each
one, prepare the December 31, 2011 adjusting entry. ITS has made no adjusting entries during 2011.
a.
On August 1, 2011, ITS rented a warehouse from Phillips Company by paying $78,012. The payment
was for a three-year rental period. ITS recorded the payment of cash with a debit to Prepaid Rent.
b.
On February 1, 2011, ITS received $20,160 from a customer who prepaid for a four-year service
contract. Assume the services are provided evenly over the life of the contract. ITS recorded the
receipt of cash with a credit to Service Revenue.
c.
On May 1, 2011, ITS borrowed $250,000 from a bank. The loan is for a term of five years, has an
interest rate of 7.75%, interest is to be paid every May 1 starting in 2012, and the principle is to be
repaid at the maturity date.
d.
On January 1, 2011, ITS purchased some testing equipment at a cost of $78,600. ITS uses the straightline depreciation method and assigned a life of 4 years and no residual value to the equipment.
e.
ITS’s December 2011 utility expense bill was received on December 31, 2011, and amounted to $630.
ITS will not pay the bill until in January 2012.
8
3.
(8 points) Given the following selected accounts from a company’s year-end trial balance, prepare the
appropriate closing entries.
Accounts
Common Stock
Retained Earnings
Service Fee Revenue
Interest Revenue
Wages Expense
Rent Expense
Tax Expense
DR
CR
10,000
1,000
28,000
2,500
24,300
4,200
2,800
9
4.
(16 points) Given the following account information for Leong Corporation, prepare a balance sheet
for the company as of December 31, 2011. You may omit the title. All accounts have normal balances.
Accumulated Depr. - Bldg. & Equip.
Advertising Expense
Bonds Payable (due in 2015)
Buildings
Cash
Common Stock
Depreciation Expense
Dividends
Interest Expense
Interest Payable
25,000
1,560
78,000
130,400
35,000
60,000
8,000
50,400
2,400
1,500
Inventory
Land
Notes Payable (due in 6 months)
Retained Earnings
Revenue
Salaries and Wages Expense
Supplies
Taxes Payable
Utilities Expense
102,000
137,320
19,400
?
341,400
53,040
6,860
3,000
1,320
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Solutions
Multiple Choice
Que. No. Answer
1
d
2
b
3
a
4
b
5
b
6
b
7
a
8
d
9
c
10
d
11
c
12
c
13
c
Que. No.
14
15
16
17
18
19
20
21
22
23
24
25
26
Answer
a
b
b
c
a
c
a
c
a
d
d
d
c
Problems
1.
Que. No.
a
b
c
d
e
f
g
h
i
2.
a.
b.
c.
Answer
D
C
S
G
M
P
L
O
Q
Rent Expense
Prepaid Rent
(78012 x 5/36 = 10835)
10835
10835
Service Revenue
15540
Unearned Service Revenue
(20160 x 37/48 = 15540)
15540
Interest Expense
12917
Interest Payable
(250000 x .0775 x 8/12 = 12917)
12917
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d.
e.
Depreciation Expense
Accumulated Depreciation
(78600/4 = 19650)
Utilities Expense
Utilities Payable
3.
Service Fee Revenue
Interest Revenue
Retained Earnings
Wages Expense
Rent Expense
Tax Expense
19650
19650
630
630
28,000
2,500
800
24,300
4,200
2,800
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4.
Leong Corporation
Balance Sheet
December 31, 2011
Assets
Current Assets
Cash
Inventory
Supplies
Total Current Assets
Property, Plant, and Equipment
Land
Building
Accumulated depreciation – Bldg
Total Property, Plant, and Equipment
Total assets
Liabilities & Stockholders' Equity
Current Liabilities
Notes payable
Taxes payable
Interest payable
Total current liabilities
Long-term liabilities
Bond payable
Total liabilities
Stockholders’ Equity
Common stock
Retained earnings*
Total stockholders' equity
Total liabilities & stockholders' equity
$ 35,000
102,000
6,860
$ 143,860
137,320
$ 130,400
(25,000)
105,400
242,720
$ 386,580
$ 19,400
3,000
1,500
$ 23,900
78,000
101,900
60,000
224,680
* Net Income: $341,400 - $53,040 - $8,000 - $2,400 - $1,560 - $1,320 = $275,080
Net Income less dividends: = $275,080 - $50,400 = $224,680
284,680
$ 386,580