ACC 557 Final Exam

ACC 557 Final Exam

 

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Chapter 9 Through 14

 

PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

 

 

CHAPTER LEARNING OBJECTIVES

  1. Describe how the historical cost principle applies to plant assets.
  2. Explain the concept of depreciation and how to compute it.
  3.    Distinguish between revenue and capital expenditures, and explain the entries for each.
  4.      Explain how to account for the disposal of a plant asset.
  5.      Compute periodic depletion of natural resources.
  6. Explain the basic issues related to accounting for intangible assets.
  7.      Indicate how plant assets, natural resources, and intangible assets are reported.
  8. Explain how to account for the exchange of plant assets.

 

TRUE-FALSE STATEMENTS

  1. All plant assets (fixed assets) must be depreciated for accounting purposes.

 

 

  1. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

 

 

  1. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.

 

 

  1. Land improvements are generally charged to the Land account.

 

 

  1. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

 

 

  1. The book value of a plant asset is always equal to its fair market value.

 

 

  1. Recording depreciation on plant assets affects the balance sheet and the income statement.

 

 

  1. The depreciable cost of a plant asset is its original cost minus obsolescence.

 

 

  1. Recording depreciation each period is an application of the expense recognition principle.

 

  1. The Accumulated Depreciation account represents a cash fund available to replace plant assets.

 

 

  1. In calculating depreciation, both plant asset cost and useful life are based on estimates.

 

 

  1. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

 

 

  1. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

 

 

  1. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset’s useful life.

 

 

  1. Under the double-declining-balance method, the depreciation rate used each year remains constant.

 

 

  1. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

 

 

  1. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.

 

 

  1. A change in the estimated salvage value of a plant asset requires a restatement of prior years’ depreciation.

 

 

  1. To determine a new depreciation amount after a change in estimate of a plant asset’s useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.

 

 

 

  1. Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

 

 

  1. Capital expenditures are expenditures that increase the company’s investment in productive facilities.

 

 

  1. Ordinary repairs should be recognized when incurred as revenue expenditures.

 

 

  1. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

 

 

  1. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

 

 

  1. The fair value of a plant asset is always the same as its book value.

 

 

  1. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

 

 

  1. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale are less than the asset’s book value.

 

 

  1. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

 

 

  1. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.

 

 

  1. A plant asset must be fully depreciated before it can be removed from the books.

 

 

  1. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

 

 

  1. Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.

 

 

  1. The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.

 

 

  1. Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.

 

 

  1. Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.

 

 

  1. The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.

 

 

  1. Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.

 

 

  1. Natural resources include standing timber and underground deposits of oil, gas, and minerals.

 

 

  1. If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.

 

 

  1. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

 

 

  1. Research and development costs which result in a successful product which is patentable are charged to the Patent account.

 

 

  1. The cost of a patent must be amortized over a 20-year period.

 

 

 

  1. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

 

 

  1. The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.

 

 

  1. The asset turnover is calculated as total sales divided by ending total assets.

 

 

  1. Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.

 

 

a47.     An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.

 

 

a48.     Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.

 

 

a49.     When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.

 

 

  1. When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.

 

 

  1. Recognition of depreciation permits the accumulation of cash for the replacement of the asset.

 

 

  1. When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.

 

 

  1. Depletion expense is reported in the income statement as an operating expense.

 

 

  1. Goodwill is not recognized in accounting unless it is acquired from purchasing another business enterprise.

 

 

  1. Research and development costs should be charged to expense when incurred.

 

 

a56.      A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.

 

 

 

 

 

 

MULTIPLE CHOICE QUESTIONS

  1. The cost of a purchased building includes all of the following except
  2. closing costs.
  3. real estate broker’s commission.
  4. remodeling costs.
  5. All of these answers are correct.

 

 

  1. A company purchased land for $90,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at
  2. $107,000.
  3. $90,000.
  4. $70,000.
  5. $102,000.

 

 

 

 

  1. Which one of the following items is not considered a part of the cost of a truck purchased for business use?
  2. Sales tax
  3. Truck license
  4. Freight charges
  5. Cost of lettering on side of truck

 

 

  1. Which of the following assets does not decline in service potential over the course of its useful life?
  2. Equipment
  3. Furnishings
  4. Land
  5. Fixtures

 

 

  1. The four subdivisions for plant assets are
  2. land, land improvements, buildings, and equipment.
  3. intangibles, land, buildings, and equipment.
  4. furnishings and fixtures, land, buildings, and equipment.
  5. property, plant, equipment, and land.

 

 

  1. The cost of land does not include
  2. real estate brokers’ commission.
  3. annual property taxes.
  4. accrued property taxes assumed by the purchaser.
  5. title fees.

 

 

  1. Gagner Clinic purchases land for $175,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land?
  2. $157,200
  3. $175,000
  4. $179,700
  5. $157,500

 

 

 

  1. Carey Company buys land for $50,000 on 12/31/14. As of 3/31/15, the land has appreciated in value to $50,700. On 12/31/15, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2015?
  2. $0
  3. $700
  4. $1,100
  5. $1,800

 

 

  1. Hull Company acquires land for $86,000 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

Hull will record the acquisition cost of the land as

  1. $96,000.
  2. $87,690.
  3. $89,610.
  4. $89,370.

 

 

 

  1. Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $25,000. Which of the following statements is true with respect to these additions?
  2. $40,000 should be debited to the Land account.
  3. $25,000 should be debited to Land Improvements.
  4. $65,000 should be debited to the Land account.
  5. $65,000 should be debited to Land Improvements.

 

 

 

  1. Land improvements should be depreciated over the useful life of the
  2. land.
  3. buildings on the land.
  4. land or land improvements, whichever is longer.
  5. land improvements.

 

 

  1. Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
  2. Excavation fees are capitalized but building permit fees are not.
  3. Architect fees are capitalized but building permit fees are not.
  4. Interest is capitalized during the construction as part of the cost of the building.
  5. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

 

 

 

  1. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?
  2. The cost of the building will not include the repainting and recarpeting costs.
  3. The cost of the building will include the cost of replacing the roof.
  4. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
  5. The wiring is part of the computer costs, not the building cost.

 

 

  1. Engler Company purchases a new delivery truck for $55,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck?
  2. $61,050
  3. $60,890
  4. $59,000
  5. $60,600

 

 

 

  1. All of the following factors in computing depreciation are estimates except
  2. cost.
  3. residual value.
  4. salvage value.
  5. useful life.

 

 

  1. Presto Company purchased equipment and these costs were incurred:

Cash price                                             $65,000

Sales taxes                                                 3,600

Insurance during transit                               640

Installation and testing                                860

Total costs                                            $70,100

Presto will record the acquisition cost of the equipment as

  1. $65,000.
  2. $68,600.
  3. $69,240.
  4. $70,100.

 

 

 

 

  1. Angie’s Blooms purchased a delivery van for $40,000. The company was given a $4,000 cash discount by the dealer, and paid $2,000 sales tax. Annual insurance on the van is $1,000. As a result of the purchase, by how much will Angie’s Blooms increase its van account?
  2. $40,000
  3. $36,000
  4. $39,000
  5. $38,000

 

 

 

  1. Yocum Company purchased equipment on January 1 at a list price of $120,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yocum was given a $2,400 cash discount. Yocum paid $6,000 sales tax on the equipment, and paid installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?
  2. $125,360
  3. $129,360
  4. $131,760
  5. $123,600

 

 

 

  1. Interest may be included in the acquisition cost of a plant asset
  2. during the construction period of a self-constructed asset.
  3. if the asset is purchased on credit.
  4. if the asset acquisition is financed by a long-term note payable.
  5. if it is a part of a lump-sum purchase.

 

 

  1. The balance in the Accumulated Depreciation account represents the
  2. cash fund to be used to replace plant assets.
  3. amount to be deducted from the cost of the plant asset to arrive at its fair market value.
  4. amount charged to expense in the current period.
  5. amount charged to expense since the acquisition of the plant asset.

 

 

  1. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?
  2. Salvage value
  3. Estimated useful life
  4. Cash needed to replace the plant asset
  5. Cost

 

 

 

  1. Depreciation is the process of allocating the cost of a plant asset over its service life in
  2. an equal and equitable manner.
  3. an accelerated and accurate manner.
  4. a systematic and rational manner.
  5. a conservative market-based manner.

 

 

  1. The book value of an asset is equal to the
  2. asset’s fair value less its historical cost.
  3. blue book value relied on by secondary markets.
  4. replacement cost of the asset.
  5. asset’s cost less accumulated depreciation.

 

 

  1. Accountants do not attempt to measure the change in a plant asset’s fair value during ownership because
  2. the assets are not held for resale.
  3. plant assets cannot be sold.
  4. losses would have to be recognized.
  5. it is management’s responsibility to determine fair values.

 

 

  1. Depreciation is a process of
  2. asset devaluation.
  3. cost accumulation.
  4. cost allocation.
  5. asset valuation.

 

 

  1. Recording depreciation each period is necessary in accordance with the
  2. going concern principle.
  3. historical cost principle.
  4. expense recognition principle.
  5. asset valuation principle.

 

 

  1. In computing depreciation, salvage value is
  2. the fair value of a plant asset on the date of acquisition.
  3. subtracted from accumulated depreciation to determine the plant asset’s depreciable cost.
  4. an estimate of a plant asset’s value at the end of its useful life.
  5. ignored in all the depreciation methods.

 

 

 

  1. When estimating the useful life of an asset, accountants do not consider
  2. the cost to replace the asset at the end of its useful life.
  3. obsolescence factors.
  4. expected repairs and maintenance.
  5. the intended use of the asset.

 

 

  1. Useful life is expressed in terms of use expected from the asset under the
  2. declining-balance method.
  3. straight-line method.
  4. units-of-activity method.
  5. none of these answer choices are correct.

 

 

  1. Equipment was purchased for $300,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
  2. $70,800.
  3. $58,800.
  4. $49,200.
  5. $48,000.

 

 

 

  1. A truck was purchased for $180,000 and it was estimated to have a $36,000 salvage value at the end of its useful life. Monthly depreciation expense of $3,000 was recorded using the straight-line method. The annual depreciation rate is
  2. 20%.
  3. 2%.
  4. 8%.
  5. 25%.

 

 

 

  1. A company purchased factory equipment on April 1, 2015 for $160,000. It is estimated that the equipment will have a $20,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2015 is
  2. $16,000.
  3. $14,000.
  4. $10,500.
  5. $12,000.

 

 

 

 

  1. A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is
  2. 20%.
  3. 25%.
  4. 40%.
  5. 5%.

 

 

 

  1. The declining-balance method of depreciation produces
  2. a decreasing depreciation expense each period.
  3. an increasing depreciation expense each period.
  4. a declining percentage rate each period.
  5. a constant amount of depreciation expense each period.

 

 

  1. A company purchased factory equipment for $700,000. It is estimated that the equipment will have a $70,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
  2. $280,000.
  3. $168,000.
  4. $252,000.
  5. $120,960.

 

 

 

  1. The units-of-activity method is generally not suitable for
  2. airplanes.
  3. buildings.
  4. delivery equipment.
  5. factory machinery.

 

 

  1. A plant asset cost $288,000 and is estimated to have a $36,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be
  2. $24,120.
  3. $40,500.
  4. $35,436.
  5. $27,570.

 

 

 

 

  1. A factory machine was purchased for $375,000 on January 1, 2015. It was estimated that it would have a $75,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2015. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2015 would be
  2. $37,500.
  3. $60,000.
  4. $75,000.
  5. $30,000.

 

 

 

  1. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which
  2. is used for tax purposes.
  3. must be used for financial statement purposes.
  4. is required by the SEC.
  5. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

 

 

  1. Which of the following methods of computing depreciation is production based?
  2. Straight-line
  3. Declining-balance
  4. Units-of-activity
  5. None of these answer choices are correct.

 

 

  1. Management should select the depreciation method that
  2. is easiest to apply.
  3. best measures the plant asset’s market value over its useful life.
  4. best measures the plant asset’s contribution to revenue over its useful life.
  5. has been used most often in the past by the company.

 

 

  1. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is
  2. straight-line.
  3. units-of-activity.
  4. declining-balance.
  5. None of these answers are correct.

 

 

 

  1. On October 1, 2015, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for 2015 if Holt Company uses the straight-line method of depreciation?
  2. $4,500
  3. $24,000
  4. $6,000
  5. $12,000

 

 

 

  1. On October 1, 2015, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2015, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation?
  2. $78,000
  3. $90,000
  4. $108,000
  5. $114,000

 

 

 

  1. Which depreciation method is most frequently used in businesses today?
  2. Straight-line
  3. Declining-balance
  4. Units-of-activity
  5. Double-declining-balance

 

 

  1. Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $48,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $4,000. What is the depreciation cost per unit?
  2. $4.40
  3. $4.80
  4. $.44
  5. $.48

 

 

 

  1. Units-of-activity is an appropriate depreciation method to use when
  2. it is impossible to determine the productivity of the asset.
  3. the asset’s use will be constant over its useful life.
  4. the productivity of the asset varies significantly from one period to another.
  5. the company is a manufacturing company.

 

 

 

  1. The calculation of depreciation using the declining balance method,
  2. ignores salvage value in determining the amount to which a constant rate is applied.
  3. multiplies a constant percentage times the previous year’s depreciation expense.
  4. yields an increasing depreciation expense each period.
  5. multiplies a declining percentage times a constant book value.

 

 

  1. Farr Company purchased a new van for floral deliveries on January 1, 2015. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2015?
  2. $11,200
  3. $8,400
  4. $16,800
  5. $22,400

 

 

 

 

  1. Farr Company purchased a new van for floral deliveries on January 1, 2015. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2016?
  2. $8,960
  3. $26,880
  4. $35,840
  5. $13,440

 

 

 

  1. Moreno Company purchased equipment for $900,000 on January 1, 2014, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $40,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2016 will be
  2. $100,000.
  3. $60,000.
  4. $108,880.
  5. $68,880.

 

 

 

 

  1. A plant asset was purchased on January 1 for $100,000 with an estimated salvage value of $20,000 at the end of its useful life. The current year’s Depreciation Expense is $10,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $50,000. The remaining useful life of the plant asset is
  2. 10 years.
  3. 8 years.
  4. 5 years.
  5. 3 years.

 

 

 

  1. Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
  2. $35,400.
  3. $29,400.
  4. $24,600.
  5. $24,000.

 

 

 

  1. Equipment was purchased for $85,000 on January 1, 2015. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2016, if the straight-line method of depreciation is used?
  2. $33,400
  3. $16,700
  4. $14,300
  5. $28,600

 

 

 

  1. A company purchased factory equipment on June 1, 2015, for $160,000. It is estimated that the equipment will have a $10,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2015, is
  2. $15,000.
  3. $8,750.
  4. $7,500.
  5. $6,250.

 

 

 

 

  1. A plant asset was purchased on January 1 for $60,000 with an estimated salvage value of $12,000 at the end of its useful life. The current year’s Depreciation Expense is $6,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $30,000. The remaining useful life of the plant asset is
  2. 10 years.
  3. 8 years.
  4. 5 years.
  5. 3 years.

 

 

 

  1. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is
  2. $360,000.
  3. $300,000.
  4. $200,000.
  5. $50,000.

 

 

 

  1. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is
  2. $70,000.
  3. $72,000.
  4. $50,000.
  5. None of these answer choices are correct.

 

 

 

  1. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. Assuming straight-line deprecation, the book value of the equipment at the beginning of the third year would be
  2. $360,000.
  3. $150,000.
  4. $260,000.
  5. $100,000.

 

 

 

 

  1. Tomko Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Tomko uses straight-line depreciation, annual depreciation will be
  2. $6,150.
  3. $6,108.
  4. $9,150.
  5. $5,640.

 

 

 

  1. Drago Company purchased equipment on January 1, 2015, at a total invoice cost of $1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2016, if the straight-line method of depreciation is used?
  2. $240,000
  3. $480,000
  4. $234,000
  5. $468,000

 

 

 

  1. On January 1, a machine with a useful life of five years and a residual value of $30,000 was purchased for $90,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?
  2. $21,600
  3. $36,000
  4. $28,800
  5. $17,280

 

 

 

  1. A machine with a cost of $480,000 has an estimated salvage value of $30,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
  2. $150,000
  3. $90,000
  4. $130,000
  5. $160,000

 

 

 

 

  1. Equipment with a cost of $400,000 has an estimated salvage value of $25,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?
  2. $100,000
  3. $113,800
  4. $82,500
  5. $93,750

 

 

 

  1. Eckman Company purchased equipment for $120,000 on January 1, 2014, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $6,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2016 will be
  2. $17,280.
  3. $27,360.
  4. $28,800.
  5. $16,416.

 

 

 

  1. Grimwood Trucking purchased a tractor trailer for $171,500. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $24,500. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record?
  2. $12,250
  3. $15,435
  4. $13,230
  5. $14,292

 

 

 

  1. On May 1, 2015, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2008. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What depreciation expense should be recorded on this asset in 2015?
  2. $22,500.
  3. $25,000.
  4. $33,750.
  5. $67,500.

 

 

 

 

  1. On May 1, 2015, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2008. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What gain should be recognized on the sale?
  2. $22,500.
  3. $45,000.
  4. $47,500.
  5. $90,000.

 

 

 

  1. Mather Company purchased equipment on January 1, 2015 at a total invoice cost of $336,000; additional costs of $6,000 for freight and $30,000 for installation were incurred. The equipment has an estimated salvage value of $12,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2016 if the straight-line method of depreciation is used is:
  2. $129,600.
  3. $132,000.
  4. $144,000.
  5. $148,800.

 

 

 

  1. Kingston Company purchased a piece of equipment on January 1, 2015. The equipment cost $200,000 and had an estimated life of 8 years and a salvage value of $25,000. What was the depreciation expense for the asset for 2016 under the double-declining-balance method?
  2. $21,667.
  3. $37,500.
  4. $50,000.
  5. $39,063.

 

 

 

  1. Able Towing Company purchased a tow truck for $180,000 on January 1, 2014. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $36,000. On December 31, 2016, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2016) and the salvage value to $5,000. What was the depreciation expense for 2016?
  2. $18,000.
  3. $14,400.
  4. $45,000.
  5. $36,550

 

 

 

 

  1. Nicholson Company purchased equipment on January 1, 2013, for $80,000 with an estimated salvage value of $20,000 and estimated useful life of 8 years. On January 1, 2015, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $20,000. Using the straight-line method the new annual depreciation will be:
  2. $4,500.
  3. $5,000.
  4. $6,000.
  5. $6,667.

 

 

 

  1. An asset was purchased for $250,000. It had an estimated salvage value of $50,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $40,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be
  2. $30,000.
  3. $22,000.
  4. $15,000.
  5. $21,000.

 

 

 

  1. Equipment costing $70,000 with a salvage value of $14,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be
  2. $ 8,400.
  3. $18,667.
  4. $14,000.
  5. $11,200.

 

 

 

  1. Ron’s Quik Shop bought machinery for $75,000 on January 1, 2014. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2015, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2015?
  2. $12,000
  3. $ 6,000
  4. $10,000

d    $15,000

 

 

 

 

  1. Each of the following is used in computing revised annual depreciation for a change in estimate except
  2. book value.
  3. cost.
  4. depreciable cost.
  5. remaining useful life.

 

 

  1. A change in the estimated useful life of equipment requires
  2. a retroactive change in the amount of periodic depreciation recognized in previous years.
  3. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
  4. that the amount of periodic depreciation be changed in the current year and in future years.
  5. that income for the current year be increased.

 

 

  1. Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
  2. Revisions in useful life are permitted if approved by the IRS.
  3. Retroactive changes must be made to correct previously recorded depreciation.
  4. Only future years will be affected by the revision.
  5. Both current and future years will be affected by the revision.

 

 

  1. Don’s Copy Shop bought equipment for $450,000 on January 1, 2014. Don estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2015, Don decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2015?
  2. $150,000
  3. $ 60,000
  4. $ 75,000
  5. $112,500

 

 

 

  1. Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as
  2. capital expenditures.
  3. expense expenditures.
  4. ordinary repairs.
  5. revenue expenditures.

 

 

 

  1. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally
  2. expensed when incurred.
  3. capitalized as a part of the cost of the asset.
  4. debited to the Accumulated Depreciation account.
  5. not recorded until they become material in amount.

 

 

  1. Which of the following is not true of ordinary repairs?
  2. They primarily benefit the current accounting period.
  3. They can be referred to as revenue expenditures.
  4. They maintain the expected productive life of the asset.
  5. They increase the productive capacity of the asset.

 

 

  1. The paneling of the body of an open pickup truck would be classified as a(n)
  2. revenue expenditure.
  3. addition.
  4. improvement.
  5. ordinary repair.

 

 

  1. Additions and improvements
  2. occur frequently during the ownership of a plant asset.
  3. normally involve immaterial expenditures.
  4. increase the book value of plant assets when incurred.
  5. typically only benefit the current accounting period.

 

 

  1. If a plant asset is retired before it is fully depreciated and no salvage value is received,
  2. a gain on disposal occurs.
  3. a loss on disposal occurs.
  4. either a gain or a loss can occur.
  5. neither a gain nor a loss occurs.

 

 

  1. A gain or loss on disposal of a plant asset is determined by comparing the
  2. replacement cost of the asset with the asset’s original cost.
  3. book value of the asset with the asset’s original cost.
  4. original cost of the asset with the proceeds received from its sale.
  5. book value of the asset with the proceeds received from its sale.

 

 

 

  1. The book value of a plant asset is the difference between the
  2. replacement cost of the asset and its historical cost.
  3. cost of the asset and the amount of depreciation expense for the year.
  4. cost of the asset and the accumulated depreciation to date.
  5. proceeds received from the sale of the asset and its original cost.

 

 

  1. If a plant asset is sold before it is fully depreciated,
  2. only a gain on disposal can occur.
  3. only a loss on disposal can occur.
  4. either a gain or a loss can occur.
  5. neither a gain nor a loss can occur.

 

 

  1. If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset’s book value,
  2. a gain on disposal occurs.
  3. a loss on disposal occurs.
  4. there is no gain or loss on disposal.
  5. additional depreciation expense must be recorded.

 

 

  1. A company sells a plant asset which originally cost $360,000 for $120,000 on December 31, 2015. The Accumulated Depreciation account had a balance of $144,000 after the current year’s depreciation of $36,000 had been recorded. The company should recognize a
  2. $240,000 loss on disposal.
  3. $96,000 gain on disposal.
  4. $96,000 loss on disposal.
  5. $60,000 loss on disposal.

 

 

 

  1. If disposal of a plant asset occurs during the year, depreciation is
  2. not recorded for the year.
  3. recorded for the whole year.
  4. recorded for the fraction of the year to the date of the disposal.
  5. not recorded if the asset is scrapped.

 

 

  1. If a fully depreciated plant asset is still used by a company, the
  2. estimated remaining useful life must be revised to calculate the correct revised depreciation.
  3. asset is removed from the books.
  4. accumulated depreciation account is removed from the books but the asset account remains.
  5. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.

 

 

  1. Which of the following statements is not true when a fully depreciated plant asset is retired?
  2. The plant asset’s book value is equal to its estimated salvage value.
  3. The accumulated depreciation account is debited.
  4. The asset account is credited.
  5. The plant asset’s original cost equals its book value.

 

 

  1. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received,
  2. a gain on disposal will be recorded.
  3. phantom depreciation must be taken as though the asset were still on the books.
  4. a loss on disposal will be recorded.
  5. no gain or loss on disposal will be recorded.

 

 

  1. The book value of an asset will equal its fair market value at the date of sale if
  2. a gain on disposal is recorded.
  3. no gain or loss on disposal is recorded.
  4. the plant asset is fully depreciated.
  5. a loss on disposal is recorded.

 

 

  1. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $50,000. An insurance check for $125,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a
  2. Gain on Disposal of $15,000.
  3. credit to the Truck account of $60,000.
  4. credit to the Accumulated Depreciation account for $50,000.
  5. Gain on Disposal of $65,000.

 

 

 

  1. On July 1, 2015, Hale Kennels sells equipment for $220,000. The equipment originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. The accumulated depreciation account had a balance of $350,000 on January 1, 2015, using the straight-line method. The gain or loss on disposal is
  2. $30,000 gain.
  3. $20,000 loss.
  4. $30,000 loss.
  5. $20,000 gain.

 

 

 

 

  1. A loss on disposal of a plant asset is reported in the financial statements
  2. in the Other Revenues and Gains section of the income statement.
  3. in the Other Expenses and Losses section of the income statement.
  4. as a direct increase to the capital account on the balance sheet.
  5. as a direct decrease to the capital account on the balance sheet.

 

 

  1. Yanik Company’s delivery truck, which originally cost $84,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $57,000. The company received $48,000 reimbursement from its insurance company. The gain or loss as a result of the fire was
  2. $36,000 loss.
  3. $21,000 loss.
  4. $36,000 gain.
  5. $21,000 gain.

 

 

 

  1. Equipment that cost $420,000 and on which $200,000 of accumulated depreciation has been recorded was disposed of for $180,000 cash. The entry to record this event would include a
  2. gain of $40,000.
  3. loss of $40,000.
  4. credit to the Equipment account for $220,000.
  5. credit to Accumulated Depreciation for $200,000.

 

 

 

  1. A truck that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a
  2. gain of $6,000.
  3. loss of $6,000.
  4. credit to the Equipment account for $12,000.
  5. credit to Accumulated Depreciation for $60,000.

 

 

 

  1. Orr Corporation sold equipment for $30,000. The equipment had an original cost of $90,000 and accumulated depreciation of $45,000. As a result of the sale,
  2. net income will increase $30,000.
  3. net income will increase $15,000.
  4. net income will decrease $15,000.
  5. net income will decrease $30,000.

 

 

 

 

  1. Powell’s Courier Service recorded a loss of $9,000 when it sold a van that originally cost $84,000 for $15,000. Accumulated depreciation on the van must have been
  2. $78,000.
  3. $24,000.
  4. $75,000.
  5. $60,000.

 

 

 

  1. A plant asset cost $90,000 when it was purchased on January 1, 2008. It was depreciated by the straight-line method based on a 9-year life with no salvage value. On June 30, 2015, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement?
  2. No gain or loss.
  3. $20,000 loss.
  4. $15,000 loss.
  5. $10,000 gain.

 

 

 

  1. Nicklaus Company has decided to sell one of its old machines on June 30, 2015. The machine was purchased for $200,000 on January 1, 2011, and was depreciated on a straight-line basis for 10 years with no salvage value. If the machine was sold for $65,000, what was the amount of the gain or loss recorded at the time of the sale?
  2. $45,000.
  3. $135,000.
  4. $55,000.
  5. $115,000.

 

 

 

  1. On a balance sheet, natural resources may be described more specifically as all of the following except
  2. land improvements.
  3. mineral deposits.
  4. oil reserves.
  5. timberlands.

 

 

  1. Natural resources are
  2. depreciated using the units-of-activity method.
  3. physically extracted in operations and are replaceable only by an act of nature.
  4. reported at their market value.
  5. amortized over a period no longer than 40 years.

 

 

 

  1. Depletion is
  2. a decrease in market value of natural resources.
  3. the amount of spoilage that occurs when natural resources are extracted.
  4. the allocation of the cost of natural resources to expense.
  5. the method used to record unsuccessful patents.

 

 

  1. To qualify as natural resources in the accounting sense, assets must be
  2. underground.
  3. replaceable.
  4. of a mineral nature.
  5. physically extracted in operations.

 

 

  1. The method most commonly used to compute depletion is the
  2. straight-line method.
  3. double-declining-balance method.
  4. units-of-activity method.
  5. effective interest method.

 

 

  1. In computing depletion, salvage value is
  2. always immaterial.
  3. ignored.
  4. impossible to estimate.
  5. included in the calculation.

 

 

  1. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons,
  2. total depletion on the mine is based on the 1,200,000 tons.
  3. depletion expense is recognized on the 1,500,000 tons extracted.
  4. depletion expense is recognized on the 1,200,000 tons extracted and sold.
  5. a separate accumulated depletion account is set up to record depletion on the 300,000 tons extracted but not sold.

 

 

  1. A coal company invests $15 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?
  2. $750,000
  3. $300,000
  4. $75,000
  5. Cannot be determined from the information provided.

 

 

 

 

  1. Accumulated Depletion
  2. is used by all companies with natural resources.
  3. has a normal debit balance.
  4. is a contra-asset account.
  5. is never shown on the balance sheet.

 

 

  1. On July 4, 2015, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons. During 2015, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2015 would be
  2. $200,000.
  3. $120,000.
  4. $240,000.
  5. $400,000.

 

 

 

  1. Depletion expense is computed by multiplying the depletion cost per unit by the
  2. total estimated units.
  3. total actual units.
  4. number of units extracted.
  5. number of units sold.

 

 

  1. Intangible assets are the rights and privileges that result from ownership of long-lived assets that
  2. must be generated internally.
  3. are depletable natural resources.
  4. have been exchanged at a gain.
  5. do not have physical substance.

 

 

  1. Identify the item below where the terms are not related.
  2. Equipment—depreciation
  3. Franchise—depreciation
  4. Copyright—amortization
  5. Oil well—depletion

 

 

  1. A patent should
  2. be amortized over a period of 20 years.
  3. not be amortized if it has an indefinite life.
  4. be amortized over its useful life or 20 years, whichever is longer.
  5. be amortized over its useful life or 20 years, whichever is shorter.

 

 

 

  1. The entry to record patent amortization usually includes a credit to
  2. Amortization Expense.
  3. Accumulated Amortization.
  4. Accumulated Depreciation.
  5. Patents.

 

 

  1. The cost of successfully defending a patent in an infringement suit should be
  2. charged to Legal Expenses.
  3. deducted from the book value of the patent.
  4. added to the cost of the patent.
  5. recognized as a loss in the current period.

 

 

  1. An asset that cannot be sold individually in the market place is
  2. a patent.
  3. goodwill.
  4. a copyright.
  5. a trade name.

 

 

  1. Goodwill can be recorded
  2. when customers keep returning because they are satisfied with the company’s products.
  3. when the company acquires a good location for its business.
  4. when the company has exceptional management.
  5. only when there is an exchange transaction involving the purchase of an entire business.

 

 

  1. On July 1, 2015, Jenks Company purchased the copyright to Jackson Computer tutorials for $324,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $24,000. The amount of Amortization Expense recognized for the year 2015 would be
  2. $64,800.
  3. $30,000.
  4. $60,000.
  5. $32,400.

 

 

 

  1. All of the following intangible assets are amortized except
  2. copyrights.
  3. limited-life franchises.
  4. patents.
  5. trademarks.

 

 

  1. Which of the following is not an intangible asset arising from a government grant?
  2. Goodwill
  3. Patent
  4. Trademark
  5. Trade name

 

 

  1. The amortization period for a patent cannot exceed
  2. 50 years.
  3. 40 years.
  4. 20 years.
  5. 10 years.

 

 

  1. Cost allocation of an intangible asset is referred to as
  2. amortization.
  3. depletion.
  4. accretion.
  5. capitalization.

 

 

  1. A patent
  2. has a legal life of 40 years.
  3. is nonrenewable.
  4. can be renewed indefinitely.
  5. is rarely subject to litigation because it is an exclusive right.

 

 

  1. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting
  2. Legal Expense.
  3. an Intangible Loss account.
  4. the Patent account.
  5. a revenue expenditure account.

 

 

  1. Copyrights are granted by the federal government
  2. for the life of the creator or 70 years, whichever is longer.
  3. for the life of the creator plus 70 years.
  4. for the life of the creator or 70 years, whichever is shorter.
  5. and therefore cannot be amortized.

 

 

 

  1. Goodwill
  2. is only recorded when generated internally.
  3. can be subdivided and sold in parts.
  4. can only be identified with the business as a whole.
  5. can be defined as normal earnings less accumulated amortization.

 

 

  1. In recording the acquisition cost of an entire business,
  2. goodwill is recorded as the excess of cost over the fair value of identifiable net assets.
  3. assets are recorded at the seller’s book values.
  4. goodwill, if it exists, is never recorded.
  5. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

 

 

  1. Research and development costs
  2. are classified as intangible assets.
  3. must be expensed when incurred under generally accepted accounting principles.
  4. should be included in the cost of the patent they relate to.
  5. are capitalized and then amortized over a period not to exceed 40 years.

 

 

  1. A computer company has $2,800,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,000,000. What is the amount of net income or loss after these R & D costs are accounted for?
  2. $800,000 loss
  3. $2,000,000 net income
  4. $0
  5. Cannot be determined from the information provided.

 

 

 

  1. Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $90,000 in legal fees for a patent granted on January 2, 2015. On July 31, 2015, Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2015?
  2. $600,000
  3. $150,000
  4. $750,000
  5. Some other amount

 

 

 

 

  1. Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises.

Cash                                                   $1,500,000

Accounts Receivable                           4,000,000

Trademarks                                          1,000,000

Goodwill                                              3,000,000

Research & Development Costs         2,000,000

  1. $10,000,000
  2. $6,000,000
  3. $4,000,000
  4. $8,000,000

 

 

 

  1. Rooney Company incurred $560,000 of research and development cost in its laboratory to develop a patent granted on January 1, 2015. On July 31, 2015, Rooney paid $84,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2015, should be:
  2. $560,000.
  3. $84,000.
  4. $644,000.
  5. $476,000.

 

 

  1. Mehring Company reported net sales of $540,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company’s asset turnover?
  2. 2.3 times
  3. 0.6 times
  4. 1.8 times
  5. 1.5 times

 

 

 

  1. During 2015, Rathke Corporation reported net sales of $3,000,000, net income of $1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Rathke’s asset turnover is
  2. 3 times.
  3. 2.4 times.
  4. 2.0 times.
  5. .96 times.

 

 

 

 

  1. During 2015, Stein Corporation reported net sales of $5,000,000 and net income of $2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover is
  2. 5.0 times.
  3. 4.0 times.
  4. 3.3 times.
  5. 1.7 times.

 

 

 

  1. Natural resources are generally shown on the balance sheet under
  2. Intangibles.
  3. Investments.
  4. Property, Plant, and Equipment.
  5. Stockholders’ Equity.

 

 

  1. Which of the following statements concerning financial statement presentation is not a true statement?
  2. Intangibles are reported separately under Intangible Assets.
  3. The balances of major classes of assets may be disclosed in the footnotes.
  4. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.
  5. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

 

 

  1. Intangible assets
  2. should be reported under the heading Property, Plant, and Equipment.
  3. are not reported on the balance sheet because they lack physical substance.
  4. should be reported as Current Assets on the balance sheet.
  5. should be reported as a separate classification on the balance sheet.

 

 

  1. A company has the following assets:

Buildings and Equipment, less accumulated depreciation of $2,000,000            $9,600,000

Copyrights                                                                                                               960,000

Patents                                                                                                                   4,000,000

Timberlands, less accumulated depletion of $2,800,000                                       4,800,000

The total amount reported under Property, Plant, and Equipment would be

  1. $19,360,000.
  2. $14,400,000.
  3. $18,400,000.
  4. $15,360,000.

 

 

 

 

a202.    A company decides to exchange its old machine and $231,000 cash for a new machine. The old machine has a book value of $189,000 and a fair value of $210,000 on the date of the exchange. The cost of the new machine would be recorded at

  1. $420,000.
  2. $441,000.
  3. $399,000.
  4. cannot be determined.

 

 

 

a203.    A company exchanges its old office equipment and $80,000 for new office equipment. The old office equipment has a book value of $56,000 and a fair value of $40,000 on the date of the exchange. The cost of the new office equipment would be recorded at

  1. $136,000.
  2. $120,000.
  3. $96,000.
  4. cannot be determined.

 

 

 

a 204.    In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is

  1. recorded as a gain or loss.
  2. recorded if a gain but is deferred if a loss.
  3. recorded if a loss but is deferred if a gain.
  4. deferred if either a gain or loss.

 

 

a205.    Gains on an exchange of plant assets that has commercial substance are

  1. deducted from the cost of the new asset acquired.
  2. deferred.
  3. not possible.
  4. recognized immediately.

 

 

a206.    Losses on an exchange of plant assets that has commercial substance are

  1. not possible.
  2. deferred.
  3. recognized immediately.
  4. deducted from the cost of the new asset acquired.

 

 

a207.    The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the

  1. book value of the old asset.
  2. fair value of the old asset.
  3. book value of the asset acquired.
  4. fair value of the new asset.

 

 

  1. The cost of land includes all of the following except
  2. real estate brokers’ commissions.
  3. closing costs.
  4. accrued property taxes.
  5. parking lots.

 

 

  1. A term that is not synonymous with property, plant, and equipment is
  2. plant assets.
  3. fixed assets.
  4. intangible assets.
  5. long-lived tangible assets.

 

 

  1. The factor that is not relevant in computing depreciation is
  2. replacement value.
  3. cost.
  4. salvage value.
  5. useful life.

 

 

  1. Depreciable cost is the
  2. book value of an asset less its salvage value.
  3. cost of an asset less its salvage value.
  4. cost of an asset less accumulated depreciation.
  5. book value of an asset.

 

 

  1. Santayana Company purchased a machine on January 1, 2013, for $60,000 with an estimated salvage value of $15,000 and an estimated useful life of 8 years. On January 1, 2015, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $15,000. Using the straight-line method, the new annual depreciation will be
  2. $3,375.
  3. $3,750.
  4. $4,500.
  5. $5,000.

 

 

 

  1. Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as
  2. capital expenditures.
  3. expense expenditures.
  4. improvements.
  5. revenue expenditures.

 

 

  1. Improvements are
  2. revenue expenditures.
  3. debited to an appropriate asset account when they increase useful life.
  4. debited to accumulated depreciation when they do not increase useful life.
  5. debited to an appropriate expense account when they do not increase useful life.

 

 

  1. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the
  2. salvage value of the asset sold.
  3. market value of the asset sold.
  4. book value of the asset sold.
  5. accumulated depreciation on the asset sold.

 

 

  1. The entry to record depletion expense
  2. decreases stockholders’ equity and assets.
  3. decreases net income and increases liabilities.
  4. decreases assets and liabilities.
  5. decreases assets and increases liabilities.

 

 

  1. All of the following are intangible assets except
  2. copyrights.
  3. goodwill.
  4. patents.
  5. research and development costs.

 

 

  1. A purchased patent has a legal life of 20 years. It should be
  2. expensed in the year of acquisition.
  3. amortized over 20 years regardless of its useful life.
  4. amortized over its useful life if less than 20 years.
  5. not amortized.

 

 

  1. The asset turnover is computed by dividing
  2. net income by average total assets.
  3. net sales by average total assets.
  4. net income by ending total assets.
  5. net sales by ending total assets.

 

 

a220.    In an exchange of plant assets that has commercial substance

  1. neither gains nor losses are recognized immediately.
  2. gains, but not losses, are recognized immediately.
  3. losses, but not gains, are recognized immediately.
  4. both gains and losses are recognized immediately.

 

 

  1. As a recent graduate of State University you’re aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation?
  2. The method used to ensure that the depreciation rate remains constant from year to year.
  3. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately.
  4. The method used to prorate annual depreciation on a time basis.
  5. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.

 

 

  1. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on land costing £1,600,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2015 and it has a useful life of 40 years. The price of the building included land improvements costing £480,000 and personal property costing £600,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2015?
  2. £268,000
  3. £160,000
  4. £341,000
  5. £301,000

 

 

  1. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on land costing £1,600,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2015 and it has a useful life of 40 years. The price of the building included land improvements costing £480,000 and personal property costing £600,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company’s December 31, 2015 statement of financial position?
  2. £6,132,000
  3. £6,059,000
  4. £5,187,000
  5. £6,240,000

 

 

  1. IFRS allows companies to revalue plant assets to fair value. Which of the following statements is true regarding revaluation?
  2. At the time a company purchases an asset it must decide whether to follow revaluation procedures for the asset; once the election is made, it must be followed for the remainder of the asset’s useful life.
  3. Assets that are experiencing rapid price changes must be revalued quarterly, other assets can be revalued on an annual basis.
  4. The journal entry to record a revaluation when the asset’s price has increased includes a credit to the account revaluation surplus.
  5. All of the choices are correct regarding revaluation of plant assets.

 

 

  1. IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value, where is the account “Revaluation Surplus” reported?
  2. On the income statement as part of income from continuing operations (other revenues and gains).
  3. On the income statement as part of discontinued operations (discontinuing historical cost).
  4. On the statement of financial position as part of accumulated comprehensive income (equity).
  5. All of the choices are acceptable methods for the reporting of “Revaluation Surplus”.

 

 

  1. Which of the following statements concerning IFRS and U.S. GAAP is true?
  2. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets.
  3. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP.
  4. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments.
  5. All of the choices are true regarding IFRS and U.S. GAAP.

 

 


BRIEF EXERCISES

BE 227

Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X).

_____  1.   Parking lots

_____  2.   Electricity used by a machine

_____  3.   Excavation costs

_____  4.   Interest on building construction loan

_____  5.   Cost of trial runs for machinery

_____  6.   Drainage costs

_____  7.   Cost to install a machine

_____  8.   Fences

_____  9.   Unpaid (past) property taxes assumed

_____10.   Cost of tearing down a building when land and a building on it are purchased

 

 

BE 228

Farley Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $70,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account.

 

BE 229

Iverson Company purchased a delivery truck for $45,000 on January 1, 2015. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2015 and 2016.

 

 

BE 230

Iverson Company purchased a delivery truck for $45,000 on January 1, 2015. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2015 and 22,000 miles in 2016. Compute depreciation expense using the units-of-activity method for the years 2015 and 2016.

 

 

BE 231

Weller Company purchased a truck for $66,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided.

 

Units-of-activity                                          $                                 

 

Double-declining-balance                             $                                 

 

 

BE 232

On January 1, 2013, Santo Company purchased a computer system for $30,500. The system had an estimated useful life of 5 years and no salvage value. At January 1, 2015, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2015 and 2016?

 

 

BE 233

Carey Enterprises sold equipment on January 1, 2015 for $10,000. The equipment had cost $48,000. The balance in Accumulated Depreciation at January 1 is $40,000. What entry would Carey make to record the sale of the equipment?

 

 

BE 234

On January 1, 2015, Petersen Enterprises purchased natural resources for $1,800,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion expense for the month?

 

 

BE 235

On January 2, 2015, Kerwin Company purchased a patent for $48,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2015 to record amortization expense on the patent?

 

 

BE 236

Using the following data for Renfro, Inc., compute its asset turnover.

Notson, Inc.

Net Income 2015                                                 $   123,000

Total Assets 12/31/15                                           2,443,000

Total Assets 12/31/14                                           1,880,000

Net Sales 2015                                                       2,135,000

 

 

 

 

EXERCISES

Ex. 237

Hunt Company purchased factory equipment with an invoice price of $90,000. Other costs incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life.

 

Instructions

(a)    Compute the acquisition cost of the equipment. Clearly identify each element of cost.

(b)    If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be __________.

 

 


Ex. 238

For each entry below make a correcting entry if necessary. If the entry given is correct, then state “No entry required.”

(a)    The $60 cost of repairing a printer was charged to Equipment.

(b)    The $5,000 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c)    The $6,000 closing costs associated with the acquisition of land were debited to Miscellaneous Expense.

(d)    A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In.

 

Ex. 239

Garrison Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land.

 

Debits

  1. Cost of real estate purchased as a plant site (land and building).                            $ 250,000
  2. Accrued real estate taxes paid at the time of the purchase of the real estate.                 4,000
  3. Cost of demolishing building to make land suitable for construction of a new

building.                                                                                                                      15,000

  1. Architect’s fees on building plans.                                                                                 14,000
  2. Excavation costs for new building.                                                                                24,000
  3. Cost of filling and grading the land.                                                                                 5,000
  4. Insurance and taxes during construction of building.                                                       6,000
  5. Cost of repairs to building under construction caused by a small fire.                           7,000
  6. Interest paid during the year, of which $54,000 pertains to the construction

period.                                                                                                                        64,000

  1. Full payment to building contractor.                                                                           780,000
  2. Cost of parking lots and driveways.                                                                             46,000
  3. Real estate taxes paid for the current year on the land.                                                   4,000

Total Debits                                                                                                     $1,219,000


Ex. 239         (Cont.)

Credits

  1. Insurance proceeds for fire damage.                                                                              $3,000
  2. Proceeds from salvage of demolished building                                                              3,500

Total Credits                                                                                                           $6,500

 

Instructions

Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.

 

Item                    Land                         Buildings                  Other                     Account Title

 

 

Ex. 240

On March 1, 2015, Landon Company acquired real estate on which it planned to construct a small office building. The company paid $90,000 in cash. An old warehouse on the property was razed at a cost of $7,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney’s fee for work concerning the land purchase, $4,000 real estate broker’s fee, $7,800 architect’s fee, and $14,000 to put in driveways and a parking lot.

 

Instructions

Determine the amount to be reported as the cost of the land.

 

 


 

Ex. 241

Ermler Company purchased a machine at a cost of $80,000. The machine is expected to have a $5,000 salvage value at the end of its 5-year useful life.

Instructions

Compute annual depreciation for the first and second years using the

(a)        straight-line method.

(b)       double-declining-balance method.

 

Ex. 242

Alvarado Company purchased a new machine for $400,000. It is estimated that the machine will have a $40,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used.

 

Instructions

Prepare a depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life.

 

 

Ex. 243

Dougan Company purchased equipment on January 1, 2014 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life.

Instructions

Answer the following independent questions.

  1. Compute the amount of depreciation expense for the year ended December 31, 2014, using the straight-line method of depreciation.
  2. If 16,000 units of product are produced in 2014 and 24,000 units are produced in 2015, what is the book value of the equipment at December 31, 2015? The company uses the units-of-activity depreciation method.
  3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2016?

 

Ex. 244

A plant asset acquired on October 1, 2015, at a cost of $400,000 has an estimated useful life of 10 years. The salvage value is estimated to be $40,000 at the end of the asset’s useful life.

Instructions

Determine the depreciation expense for the first two years using:

(a)     the straight-line method.

(b)    the double-declining-balance method.

 

Ex. 245

Jack’s, a popular pizza hang-out, has a thriving delivery business. Jack’s has a fleet of three delivery automobiles. Prior to making the entry for this year’s depreciation expense, the subsidiary ledger for the fleet is as follows:

Accumulated

Estimated              Depr.—Beg.     Miles Operated

Car        Cost              Salvage Value          Life in Miles           of the Year           During Year

1       $21,000                $3,000                   75,000                   $2,520                   20,000

2         18,000                  2,400                   60,000                     2,340                   22,000

3         23,500                  2,500                   70,000                     2,000                   19,000

Instructions

(a)   Determine the depreciation rates per mile for each car.

(b)   Determine the depreciation expense for each car for the current year.

(c)   Make one compound journal entry to record the annual depreciation expense for the fleet.

 

Ex. 246

The Hartley Clinic purchased a new surgical laser for $90,000. The estimated salvage value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5.

 

Instructions

(a)    Compute the annual depreciation for each of the five years under each of the following methods:

(1)    straight-line.

(2)    units-of-activity.

(b)    If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

(c)    Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?

 

 

Ex. 247

The December 31, 2014 balance sheet of Jensen Company showed Equipment of $76,000 and Accumulated Depreciation of $18,000. On January 1, 2015, the company decided that the equipment has a remaining useful life of 6 years with a $4,000 salvage value.

Instructions

Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

 

Ex. 248

South Airlines purchased a 747 aircraft on January 1, 2014, at a cost of $35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On January 1, 2017 the airline revises the total estimated useful life to 15 years with a revised salvage value of $3,500,000.

 

Instructions

(a)    Compute the depreciation and book value at December 31, 2016 using the straight-line method and the double-declining-balance method.

(b)    Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2017.

 

 

Ex. 249

Hayden Company purchased a machine on January 1, 2015, at a cost of $90,000. It is expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2015 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2015 was $55,000 as the result of depreciating the machine incorrectly.

 

Instructions

Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.)

 

Ex. 250

Equipment was acquired on January 1, 2012, at a cost of $90,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2015, using the straight-line method. On January 1, 2016, the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8 years.

 

Instructions

Determine the depreciation expense for 2016.

 

 

Ex. 251

Frank White the new controller of Youngman Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2015. His findings are as follows.

 

 

Type of Asset

 

Date Acquired

 

 

Cost

Accumulated Depreciation 1/1/15 Useful Life
in Years
 

Salvage Value

Old Proposed Old Proposed
Buildings 1/1/09 $1,600,000 $228,000 40 50 $80,000 $52,000
Warehouse 1/1/10        207,000     40,000 25 20     7,000     5,000

 

 

All assets are depreciated by the straight-line method. Youngman Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Frank’s proposed changes.

 

Instructions

(a)   Compute the revised annual depreciation on each asset in 2015. (Show computations.)

(b)    Prepare the entry (or entries) to record depreciation on the building in 2015.

 

 

Ex. 252

Fleming Company purchased a machine on January 1, 2015. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring.

 

Instructions

Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue.

 

(a)_____________      (b)______________     (c)______________     (d)______________

 

(e)_____________      (f)______________      (g)______________     (h)______________

 

Ex. 253

Foley Word Processing Service uses the straight-line method of depreciation. The company’s fiscal year end is December 31. The following transactions and events occurred during the first three years.

 

2014    July     1    Purchased a computer from the Computer Center for $1,900 cash plus sales tax of $150, and shipping costs of $50.

Nov.    3    Incurred ordinary repairs on computer of $140.

Dec.  31    Recorded 2014 depreciation on the basis of a four year life and estimated salvage value of $500.

Ex. 253         (Cont.)

2015    Dec.  31    Recorded 2015 depreciation.

 

2016    Jan.     1    Paid $300 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.

 

Instructions

Prepare the necessary entries. (Show computations.)

 

Ex. 254

Identify the following expenditures as capital expenditures or revenue expenditures.

(a)    Replacement of worn out gears on factory machinery.

(b)    Construction of a new wing on an office building.

(c)    Painting the exterior of a building.

(d)    Oil change on a company truck.

(e)    Painting and lettering of a used truck upon acquisition of the truck.

(f)    Overhaul of a truck motor. One year extension in useful life is expected.

(g)    Purchased a wastebasket at a cost of $10.

 

Ex. 255

On January 1, 2013 Grier Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2014 more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Grier Company uses the straight-line method of depreciation.

 

Instructions

Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2014 through the useful life of the new equipment.

 

Telephone Expense               Depreciation Expense                   Net Income

Overstated                             Overstated                             Overstated

Year                 (Understated)                          (Understated)                          (Understated)

_____________________________________________________________________________

2014

 

2015

 

2016

 

2017

 

Ex. 256

Karley Company sold equipment on July 1, 2015 for $75,000. The equipment had cost $210,000 and had $120,000 of accumulated depreciation as of January 1, 2015. Depreciation for the first 6 months of 2015 was $12,000.

Instructions

Prepare the journal entry to record the sale of the equipment.

 

 


Ex. 257

(a)    Brown Company purchased equipment in 2008 for $150,000 and estimated a $10,000 salvage value at the end of the equipment’s 10-year useful life. At December 31, 2014, there was $98,000 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2015, the equipment was sold for $40,000.

Prepare the appropriate journal entries to remove the equipment from the books of Brown Company on March 31, 2015.

 

(b)   Finney Company sold a machine for $15,000. The machine originally cost $35,000 in 2012 and $8,000 was spent on a major overhaul in 2015 (charged to the Equipment account). Accumulated Depreciation on the machine to the date of disposal was $28,000.

Prepare the appropriate journal entry to record the disposition of the machine.

 

(c)    Stanley Company sold office equipment that had a book value of $12,000 for $16,000. The office equipment originally cost $40,000 and it is estimated that it would cost $50,000 to replace the office equipment.

Prepare the appropriate journal entry to record the disposition of the office equipment.

 

Ex. 258

Grayson’s Lumber Mill sold two machines in 2016. The following information pertains to the two machines:

Purchase       Useful      Salvage      Depreciation                                    Sales

Machine    Cost         Date           Life         Value           Method                  Date Sold     Price 

#1       $66,000      7/1/12        5 yrs.       $6,000         Straight-line               7/1/16          $15,000

#2       $50,000      7/1/15        5 yrs.       $5,000         Double-declining-      12/31/16      $30,000

balance

 

Instructions

(a)    Compute the depreciation on each machine to the date of disposal.

(b)    Prepare the journal entries in 2016 to record 2016 depreciation and the sale of each machine.

 

Ex. 259

Presented below are selected transactions for Werley Company for 2015.

 

Jan.     1    Received $9,000 scrap value on retirement of machinery that was purchased on January 1, 2005. The machine cost $90,000 on that date, and had a useful life of 10 years with no salvage value.

April 30    Sold a equipment for $34,000 that was purchased on January 1, 2012. The equipment cost $90,000, and had a useful life of 5 years with no salvage value.

Dec.  31    Discarded a business automobile that was purchased on April 1, 2011. The car cost $27,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

 

Instructions

Journalize all entries required as a result of the above transactions. Werley Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2014.

 

Ex. 260

Zimmer Company sold the following two machines in 2015:

 

Machine A                        Machine B

Cost                                                    $76,000                             $80,000

Purchase date                                       7/1/11                                1/1/12

Useful life                                            8 years                              5 years

Salvage value                                        $4,000                               $4,000

Depreciation method                       Straight-line            Double-declining-balance

Date sold                                              7/1/15                                8/1/15

Sales price                                           $35,000                             $16,000

Instructions

Journalize all entries required to update depreciation and record the sales of the two assets in 2015. The company has recorded depreciation on the machines through December 31, 2014.

 

Ex. 261

Lynn Company owns equipment that cost $120,000 when purchased on January 1, 2012. It has been depreciated using the straight-line method based on estimated salvage value of $15,000 and an estimated useful life of 5 years.

 

Instructions

Prepare Lynn Company’s journal entries to record the sale of the equipment in these four independent situations.

 

(a)     Sold for $58,000 on January 1, 2015.

(b)    Sold for $58,000 on May 1, 2015.

(c)     Sold for $32,000 on January 1, 2015.

(d)    Sold for $32,000 on October 1, 2015.

 

Ex. 262

On July 1, 2015, Melton Inc. invested $560,000 in a mine estimated to have 800,000 tons of ore of uniform grade. During the last 6 months of 2015, 100,000 tons of or were mined and sold.

 

Instructions

(a)     Prepare the journal entry to record depletion expense.

(b)    Assume that the 100,000 tons of ore were mined, but only 85,000 units were sold. How are the costs applicable to the 15,000 unsold units reported?

 

 

Ex. 263

Gorman Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no salvage value. During the first year, 200,000 tons of ore were mined and sold.

Instructions

Prepare the journal entry to record depletion expense.

 

………………………………………………………………………………………….. 160,000

Ex. 264

Kahn Mining Company purchased a mine for $60 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million.

(a)    In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion expense for the first year.

(b)    In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Prepare the journal entry to record depletion expense for the second year.

(c)    What amount and in what account are the tons of ore not sold reported?

 


Ex. 265

Quayle Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $4,200,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 12 years. Buildings costing $600,000 are erected on the site and are expected to last for 25 years. Equipment costing $300,000 with an estimated life of 15 years is installed. The buildings and the equipment possess no salvage value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore.

 

Instructions

(a)   Compute the depletion charge per ton.

(b)   Compute the depletion expense for the first year.

(c)   Compute the appropriate first year’s depreciation expense for the buildings.

(d)   Compute the appropriate first year’s depreciation expense for the equipment.

(e)   Prepare journal entries to record depletion and depreciation expenses for the year.

 

 

Ex. 266

(a)    A company purchased a patent on January 1, 2015, for $2,500,000. The patent’s legal life is 20 years but the company estimates that the patent’s useful life will only be 5 years from the date of acquisition. On June 30, 2015, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2015.

(b)    Trent Company purchased a franchise from Tastee Food Company for $400,000 on January 1, 2015. The franchise is for an indefinite time period and gives Trent Company the exclusive rights to sell Tastee Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2015.

(c)    Kline Company incurred research and development costs of $500,000 in 2015 in developing a new product. Prepare the necessary journal entries during 2015 to record these events and any adjustments at year end on December 31, 2015.

 

Ex. 267

On January 2, 2015, Olathe Company purchased a patent for $240,000. The patent has an
8-year estimated useful life and a legal life of 20 years.

Instructions

Prepare the journal entry to record patent amortization.

Ex. 268

For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer:

A—Amortization       P—Depletion

D—Depreciation        N—None of these

 

____    1. Goodwill                                                          ____     7.  Timberlands

 

____    2.  Land                                                                 ____     8.  Franchises (indefinite life)

 

____    3.  Buildings                                                          ____     9.  Licenses (limited life)

 

____    4.  Patents                                                             ____   10.  Land Improvements

 

____    5.  Copyrights                                                       ____   11.  Oil Deposits

 

____    6.  Research and development costs                     ____   12.  Equipment

 

Ex. 269

For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end.

(1)    Timber rights were purchased on a tract of land for $480,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold.


Ex. 269         (Cont.)

(2)    Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

 

Ex. 270

During the current year, Marin Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer.

(a)    Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.

(b)    Purchased a trademark from another company. The trademark can be renewed indefinitely. Marin Company expects the trademark to contribute to revenue indefinitely.

(c)    Marin Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.

(d)    Marin Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Marin Company is very confident they will obtain this patent in the next few years.

 

Ex. 271

Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2015, for Hanley Company:

Buildings                                                   $1,280,000

Goodwill                                                        650,000

Patents                                                           480,000

Coal Mine                                                      440,000

Accumulated Depreciation—Bldg.                670,000

Accumulated Depletion                                 275,000

Instructions

Prepare a partial balance sheet for Hanley Company that shows how the above listed items would be presented.

 

Ex. 272

Compute the asset turnover based on the following:

Beginning total assets                   $   800,000

Ending total assets                          1,200,000

Net income                                         300,000

Net sales                                         2,500,000

Ex. 273

During 2015 Lopez Corporation reported net sales of $3,200,000 and net income of $1,200,000. Its balance sheet reported average total assets of $1,600,000.

 

Instructions

Calculate the asset turnover.

 

Ex. 274

Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer:

PPE      Property, Plant, and Equipment

I      Intangibles

O      Other

N/A      Not on the balance sheet

_____ 1.    Goodwill                                                     _____ 7.    Timberlands

_____ 2.   Land Improvements                                   _____ 8.    Franchises

_____ 3.   Buildings                                                     _____ 9.    Licenses

_____ 4.   Accumulated Depreciation                         _____ 10.   Equipment

_____ 5.   Trademarks                                                 _____ 11.   Oil Deposits

_____ 6.   Research and development costs                _____ 12.   Land

 

 

*Ex. 275

Presented below are two independent situations:

(a)    Yount Company exchanged an old machine (cost $150,000 less $90,000 accumulated depreciation) plus $10,000 cash for a new machine. The old machine had a fair value of $54,000. Prepare the entry to record the exchange of assets by Yount Company.


*Ex. 275       (Cont.)

(b)    Lawson Company trades old equipment (cost $90,000 less $54,000 accumulated deprecia-tion) for new equipment. Lawson paid $36,000 cash in the trade. The old equipment that was traded had a fair value of $54,000. Prepare the entry to record the exchange of assets by Lawson Company. The transaction has commercial substance.

 

*Ex. 276

Dolan Company exchanges equipment with Eaton Company and Pawnee Company exchanges equipment with Fiero Company. The following information pertains to the exchanges:

Dolan Company         Pawnee Company

Equipment (cost)                                               $228,000                     $192,000

Accumulated depreciation                                   100,000                         90,000

Fair value of the equipment                                 150,000                         84,000

Cash paid                                                               90,000                            -0-

Instructions

Prepare the journal entries to record the exchanges on the books of Dolan Company and Pawnee Company. The transaction has commercial substance.

 

 


Ex. 277

Bell Company and Kene Company exchanged trucks on January 1, 2015. Bell’s truck cost $140,000, had accumulated depreciation of $115,000, and has a fair value of $15,000. Kene’s truck cost $105,000, had accumulated depreciation of $90,000, and has a fair value of $15,000.

Instructions

(a)     Journalize the exchange for Bell Company.

(b)    Journalize the exchange for Kene Company.

 

 

aEx. 278

Prepare the journal entries to record the following transactions for Ogleby Company which has a calendar year end and uses the straight-line method of depreciation.

 

  1. a) On September 30, 2015, the company exchanged old delivery equipment and $36,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2013, for $126,000 and was estimated to have a $18,000 salvage value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2014. It is estimated that the fair value of the old delivery equipment is $54,000 on September 30, 2015.

 

(b)    On June 30, 2015, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair market value of the old office equipment on June 30 was $60,000. The transaction has commercial substance.

 

 

COMPLETION STATEMENTS

  1. With the exception of land, plant assets experience a ______________ in service potential over their useful lives.

 

 

  1. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account.

 

 

  1. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account.

 

 

  1. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account.

 

 

  1. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________.

 

 

  1. ______________ is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner.

 

 

  1. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset.

 

 

 

  1. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________.

 

 

  1. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset.

 

 

  1. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage.

 

 

  1. The declining-balance method of computing depreciation is known as an _____________ depreciation method.

 

 

  1. Ordinary repairs which maintain operating efficiency and expected productive life are called _______________.

 

 

  1. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as __________________.

 

 

  1. If disposal of a plant asset occurs at any time during the year, ___________________ for the fraction of the year to the date of disposal must be recorded.

 

 

  1. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry to record the retirement requires a debit to the ___________________________ account and a credit to the _____________________ account.

 

 

  1. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur.

 

 

  1. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________.

 

 

 

  1. Natural resources have two distinguishing characteristics (1) they are physically _______________ in operations, and (2) they are _________________ only by an act of nature.

 

 

  1. In recording the purchase of a business, goodwill should be recorded for the excess of ______________ over the _______________ of the net assets acquired.

 

 

  1. The allocation of the cost of an asset to expense over its useful life is called _________________ for tangible plant assets, ________________ for natural resources, and _________________ for intangible assets.

 

 

  1. The cost of a patent should be amortized over its ____________ life or its ____________ life, whichever is shorter.

 

 

  1. The ___________________ is calculated by dividing net sales by average total assets.

 

 

a301.    In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the ______________ of the asset given up plus any cash paid by the purchaser.

 

 

a302.    A company exchanged an old machine, which originally cost $22,000 and has accumulated depreciation to date of $12,000, for a new machine. The old machine had a fair value of $14,000. The cost of the new machine should be recorded at $_____________.

 

 

MATCHING

 

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Plant assets                                             F.    Units-of-activity method
  2. Depreciation                                            G.    Double-declining-balance method
  3. Book value                                              H.    MACRS
  4. Salvage value                                           I.     Revenue expenditure
  5. Straight-line method                                J.     Capital expenditure

 

_____   1.    Small expenditures which primarily benefit the current period.

_____   2.    Cost less accumulated depreciation.

_____   3.    An accelerated depreciation method used for financial statement purposes.

_____   4.    Tangible resources that are used in operations and are not intended for resale.

_____   5.    Equal amount of depreciation each period.

_____   6.    Expected cash value of the asset at the end of its useful life.

_____   7.    Allocation of the cost of a plant asset to expense over its useful life.

_____   8.    Material expenditures which increase an asset’s operating efficiency, productive capacity, or useful life.

_____   9.    An accelerated depreciation method used for tax purposes.

_____ 10.    Useful life is expressed in terms of units of production or expected use.

 

 

 

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Gain on disposal                                     F.    Asset turnover
  2. Loss on disposal                                     G.    Goodwill
  3. Trademark                                               H.    Amortization
  4. Depletion                                                I.     Intangible asset
  5. Useful life                                                J.     Research and development costs

 

______    1.  Process of allocating the cost of an intangible asset to expense over its useful life.

______    2.  Is only recorded when an exchange has commercial substance.

______    3.  Examples are franchises and licenses.

______    4.  The allocation of the cost of a natural resource to expense over its useful life.

______    5.  Can be identified only with a business as a whole.

______    6.  A symbol that identifies a particular enterprise or product.

______    7.  When book value of asset is greater than the proceeds received from its sale.

______    8.  Must be expensed when incurred.

______    9.  Indicates how efficiently a company is able to generate sales with its assets.

______ 10.  An estimate of the expected productive life of an asset.

 

 

 

 

SHORT-ANSWER ESSAY QUESTIONS

 

S-A E 305

The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method.

 

 

S-A E 306

Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision?

 

 

S-A E 307

What are the similarities and differences between the terms depreciation, depletion, and amortization?

 

 

S-A E 308

In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment?

 

 

S-A E 309

Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.”

 

 

S-A E 310

Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can’t it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different.

 

 

S-A E 311

How is a gain or loss on the sale of a plant asset computed?

 

 

S-A E 312    (Ethics)

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms’ offerings and ensuring that its services are comparable to all others.

Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor’s services. A PRS employee poses as an employee of the client’s office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year.

In April of this year, PRS began selling a software product substitute before the competitor’s software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med’s product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.

PRS’s accountant, Jill Linsey, initially recorded the cash payments as “Loss from Lawsuit” and “Product Development,” respectively. However, Jack Meyer, the controller, instructed Jill to create an intangible asset, named “Goodwill” and charge both costs to this account. “We’re protected from another lawsuit as long as this agreement is in effect,” he says. “It’s about as close to goodwill as we’ll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway.”

 

Required:

  1. What are the ethical issues?
  2. What should Jill do?

 

 

S-A E 313    (Communication)

The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000.

The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Dan Easler, does not believe that a loss is possible. “We sold that house for more than we paid for it,” he said. “I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?”

 

Required:

Write a short memo to Mr. Easler explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation.

 

 

CHALLENGE EXERCISES

CE 1

Jack Kingman the new controller of Henderson Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2015. His findings are as follows.

 

Type of Asset Date Acquired  

Cost

Accumulated Depr. 1/1/15 Useful life (yrs.) Salvage Value
Old Proposed Old Proposed
Building 1/1/09 $1,600,000 $228,000 40 50 $80,000 $140,000
Warehouse 1/1/10        300,000     57,000 25 20   15,000     27,000

 

All assets are depreciated by the straight-line method. Henderson Company uses a calendar year in preparing annual financial statement. After discussion, management has agreed to accept Jack’s proposed changes.

 

Instructions

(a)   Compute the revised annual depreciation on each asset in 2015. (Show computation.)

(b)   Prepare the entry (or entries) to record depreciation on the building in 2015

(c)   Show how the building is reported in the 12/31/15 balance sheet.

 

 

CE 2

Logan Company owns equipment that cost $140,000 when purchased on January 1, 2012. It has been depreciated using the straight-line method based on estimated salvage value of $14,000 and an estimated useful life of 5 year.

 

 

CE 2       (Cont.)

Instructions

Prepare Logan Company’s journal entries to record the sale of the equipment in five independent situations. Update depreciation on assets disposed of at time of sale.

 

(a)    Sold for $65,000 on January 1, 2015.

(b)    Sold for $65,000 on April 1, 2015.

(c)    Sold for $35,000 on January 1, 2015.

(d)    Sold for $35,000 on September 1, 2015.

(e)    Repeat (c), assuming Logan uses double-declining balance depreciation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 10

 

LIABILITIES

 

CHAPTER LEARNING OBJECTIVES

  1. Explain a current liability, and identify the major types of current liabilities.
  2. Describe the accounting for notes payable.
  3. Explain the accounting for other current liabilities.
  4. Explain why bonds are issued, and identify the types of bonds.
  5. Prepare the entries for the issuance of bonds and interest expense.
  6. Describe the entries when bonds are redeemed or converted.
  7. Describe the accounting for long-term notes payable.
  8. Identify the methods for the presentation and analysis of long-term liabilities.

a9.   Compute the market price of a bond.

a10. Apply the effective-interest method of amortizing bond discount and bond premium.

a11. Apply the straight-line method of amortizing bond discount and bond premium.

TRUE-FALSE STATEMENTS

  1. A current liability must be paid out of current earnings.

 

 

  1. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

 

 

  1. The relationship between current liabilities and current assets is important in evaluating a company’s ability to pay off its long-term debt.

 

 

  1. A company whose current liabilities exceed its current assets may have a liquidity problem.

 

 

  1. Notes payable usually require the borrower to pay interest.

 

 

  1. Notes payable are often used instead of accounts payable.

 

 

  1. A note payable must always be paid before an account payable.

 

 

  1. A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.

 

 

  1. Most notes are not interest bearing.

 

 

  1. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note’s face value.

 

 

  1. Interest expense on a note payable is only recorded at maturity.

 

 

  1. Interest expense is reported under Other Expenses and Losses in the income statement.

 

 

  1. Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.

 

 

 

  1. The higher the sales tax rate, the more profit a retailer can earn.

 

 

  1. Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000.

 

 

  1. During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

 

 

  1. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

 

 

  1. The current ratio permits analysts to compare the liquidity of different sized companies.

 

 

  1. Working capital is current assets divided by current liabilities.

 

 

  1. FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

 

 

  1. Each bondholder may vote for the board of directors in proportion to the number of bonds held.

 

 

  1. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

 

 

  1. Bonds that the issuing company can redeem at a stated dollar amount prior to maturity are convertible bonds.

 

 

  1. A debenture bond is an unsecured bond which is issued against the general credit of the borrower.

 

 

  1. Bonds are a form of interest-bearing notes payable.

 

 

  1. Neither corporate bond interest nor dividends are deductible for tax purposes.

 

 

 

  1. A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

 

  1. The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

 

 

  1. The board of directors may authorize more bonds than are issued.

 

 

  1. The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

 

 

  1. If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.

 

 

  1. Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

 

 

  1. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

 

 

  1. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

 

 

  1. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

 

 

  1. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

 

 

  1. If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

 

 

  1. If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.

 

 

  1. If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.

 

 

  1. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

 

 

  1. The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

 

 

  1. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

 

 

  1. Gains and losses are not recognized when convertible bonds are converted into common stock.

 

 

  1. Generally, convertible bonds do not pay interest.

 

 

  1. Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

 

 

  1. A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

 

 

  1. The times interest earned ratio is computed by dividing net income by interest expense.

 

 

a 48.     The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

 

 

a 49.     The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

 

 

  1. A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.

 

 

  1. Notes payable usually are issued to meet long-term financing needs.

 

 

  1. Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.

 

 

  1. Bonds that permit bondholders to convert them into common stock at their option are known as callable bonds.

 

 

  1. The terms of the bond issue are set forth in a formal legal document called a bond indenture.

 

 

  1. The carrying value of bonds at maturity should be equal to the face value of the bonds.

 

 

  1. Premium on Bonds Payable is a contra account to Bonds Payable.

 

 

  1. When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.

 

 

  1. Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

 

 

 

 

MULTIPLE CHOICE QUESTIONS

  1. All of the following are reported as current liabilities except
  2. accounts payable.
  3. bonds payable.
  4. notes payable.
  5. unearned revenues.

 

 

 

  1. The relationship between current liabilities and current assets is
  2. useful in determining income.
  3. useful in evaluating a company’s liquidity.
  4. called the matching principle.
  5. useful in determining the amount of a company’s long-term debt.

 

 

  1. Most companies pay current liabilities
  2. out of current assets.
  3. by issuing interest-bearing notes payable.
  4. by issuing stock.
  5. by creating long-term liabilities.

 

 

  1. A current liability is a debt that can reasonably be expected to be paid
  2. within one year or the operating cycle, whichever is longer.
  3. between 6 months and 18 months.
  4. out of currently recognized revenues.
  5. out of cash currently on hand.

 

 

  1. Liabilities are classified on the balance sheet as current or
  2. deferred.
  3. unearned.
  4. long-term.
  5. accrued.

 

 

  1. From a liquidity standpoint, it is more desirable for a company to have current
  2. assets equal current liabilities.
  3. liabilities exceed current assets.
  4. assets exceed current liabilities.
  5. liabilities exceed long-term liabilities.

 

 

  1. The relationship of current assets to current liabilities is used in evaluating a company’s
  2. operating cycle.
  3. revenue-producing ability.
  4. short-term debt paying ability.
  5. long-range solvency.

 

 

  1. Which of the following is usually not an accrued liability?
  2. Interest payable
  3. Wages payable
  4. Taxes payable
  5. Notes payable

 

 

  1. In most companies, current liabilities are paid within
  2. one year through the creation of other current liabilities.
  3. the operating cycle through the creation of other current liabilities.
  4. one year or the operating cycle out of current assets.
  5. the operating cycle out of current assets.

 

  1. The entry to record the issuance of an interest-bearing note credits Notes Payable for the note’s
  2. maturity value.
  3. market value.
  4. face value.
  5. cash realizable value.

 

 

  1. With an interest-bearing note, the amount of assets received upon issuance of the note is generally
  2. equal to the note’s face value.
  3. greater than the note’s face value.
  4. less than the note’s face value.
  5. equal to the note’s maturity value.

 

 

  1. A note payable is in the form of
  2. a contingency that is reasonably likely to occur.
  3. a written promissory note.
  4. an oral agreement.
  5. a standing agreement.

 

 

  1. The entry to record the proceeds upon issuing an interest-bearing note is
  2. Interest Expense

Cash

Notes Payable

  1. Cash

Notes Payable

  1. Notes Payable

Cash

  1. Cash

Notes Payable

Interest Payable

 

 

  1. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is
  2. Interest Expense………………………………………………………….. 36,000

Cash……………………………………………………………………………      564,000

Notes Payable………………………………………………………                           600,000

  1. Cash…………………………………………………………………………… 600,000

Notes Payable………………………………………………………                           600,000


MC. 72        (Cont.)
  1. Cash…………………………………………………………………………… 600,000

Interest Expense…………………………………………………………..        36,000

Notes Payable………………………………………………………                           636,000

  1. Cash…………………………………………………………………………… 600,000

Interest Expense…………………………………………………………..        36,000

Notes Payable………………………………………………………                           600,000

Interest Payable……………………………………………………                             36,000

 

 

 

  1. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?
  2. Interest Expense………………………………………………………….. 24,000

Interest Payable……………………………………………………                             24,000

  1. Interest Expense………………………………………………………….. 24,000

Cash……………………………………………………………………                             24,000

  1. Interest Payable…………………………………………………………… 24,000

Cash……………………………………………………………………                             24,000

  1. Interest Payable…………………………………………………………… 24,000

Interest Expense…………………………………………………..                             24,000

 

 

 

  1. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?
  2. Notes Payable……………………………………………………………… 636,000

Cash……………………………………………………………………                           636,000

  1. Notes Payable……………………………………………………………… 600,000

Interest Payable……………………………………………………………        36,000

Cash……………………………………………………………………                           636,000

  1. Interest Expense………………………………………………………….. 36,000

Notes Payable………………………………………………………………      600,000

Cash……………………………………………………………………                           636,000

  1. Interest Payable…………………………………………………………… 24,000

Notes Payable………………………………………………………………      600,000

Interest Expense…………………………………………………………..        12,000

Cash……………………………………………………………………                           636,000

 

 

 

 

  1. As interest is recorded on an interest-bearing note, the Interest Expense account is
  2. increased; the Notes Payable account is increased.
  3. increased; the Notes Payable account is decreased.
  4. increased; the Interest Payable account is increased.
  5. decreased; the Interest Payable account is increased.

 

 

  1. When an interest-bearing note matures, the balance in the Notes Payable account is
  2. less than the total amount repaid by the borrower.
  3. the difference between the maturity value of the note and the face value of the note.
  4. equal to the total amount repaid by the borrower.
  5. greater than the total amount repaid by the borrower.

 

 

  1. On October 1, Steve’s Carpet Service borrows $350,000 from First National Bank on a 3-month, $350,000, 8% note. What entry must Steve’s Carpet Service make on December 31 before financial statements are prepared?
  2. Interest Payable…………………………………………………………… 7,000

Interest Expense…………………………………………………..                               7,000

  1. Interest Expense………………………………………………………….. 28,000

Interest Payable……………………………………………………                             28,000

  1. Interest Expense………………………………………………………….. 7,000

Interest Payable……………………………………………………                               7,000

  1. Interest Expense………………………………………………………….. 7,000

Notes Payable………………………………………………………                               7,000

 

 

 

  1. On October 1, Steve’s Carpet Service borrows $350,000 from First National Bank on a 3-month, $350,000, 8% note. The entry by Steve’s Carpet Service to record payment of the note and accrued interest on January 1 is
  2. Notes Payable……………………………………………………………… 357,000

Cash……………………………………………………………………                           357,000

  1. Notes Payable……………………………………………………………… 350,000

Interest Payable……………………………………………………………          7,000

Cash……………………………………………………………………                           357,000

  1. Notes Payable……………………………………………………………… 350,000

Interest Payable……………………………………………………………        28,000

Cash……………………………………………………………………                           378,000

  1. Notes Payable……………………………………………………………… 350,000

Interest Expense…………………………………………………………..          7,000

Cash……………………………………………………………………                           357,000

 

 

 

 

  1. Interest expense on an interest-bearing note is
  2. always equal to zero.
  3. accrued over the life of the note.
  4. only recorded at the time the note is issued.
  5. only recorded at maturity when the note is paid.

 

 

  1. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is
  2. Notes Payable

Interest Payable

Cash

  1. Notes Payable

Interest Expense

Cash

  1. Notes Payable

Cash

  1. Notes Payable

Cash

Interest Payable

 

 

  1. Sales taxes collected by a retailer are recorded by
  2. crediting Sales Taxes Revenue.
  3. debiting Sales Tax Expense.
  4. crediting Sales Taxes Payable.
  5. debiting Sales Taxes Payable.

 

 

  1. Unearned Rent Revenue is
  2. a contra account to Rent Revenue.
  3. a revenue account.
  4. reported as a current liability.
  5. debited when rent is received in advance.

 

 

  1. Sales taxes collected by the retailer are recorded as a(n)
  2. revenue.
  3. liability.
  4. expense.
  5. asset.

 

 

 

  1. On September 1, Joe’s Painting Service borrows $150,000 from National Bank on a 4-month, $150,000, 6% note. What entry must Joe’s Painting Service make on December 31 before financial statements are prepared?
  2. Interest Payable…………………………………………………………… 3,000

Interest Expense…………………………………………………..                               3,000

  1. Interest Expense………………………………………………………….. 9,000

Interest Payable……………………………………………………                               9,000

  1. Interest Expense………………………………………………………….. 3,000

Interest Payable……………………………………………………                               3,000

  1. Interest Expense………………………………………………………….. 3,000

Notes Payable………………………………………………………                               3,000

 

 

 

  1. On September 1, Joe’s Painting Service borrows $150,000 from National Bank on a 4-month, $150,000, 6% note. The entry by Joe’s Painting Service to record payment of the note and accrued interest on January 1 is
  2. Notes Payable……………………………………………………………… 153,000

Cash……………………………………………………………………                           153,000

  1. Notes Payable……………………………………………………………… 150,000

Interest Payable……………………………………………………………          3,000

Cash……………………………………………………………………                           153,000

  1. Notes Payable……………………………………………………………… 150,000

Interest Payable……………………………………………………………          9,000

Cash……………………………………………………………………                           159,000

  1. Notes Payable……………………………………………………………… 150,000

Interest Expense…………………………………………………………..          3,000

Cash……………………………………………………………………                           153,000

 

 

 

  1. The interest charged on a $400,000, 90-day note payable, at the rate of 8%, would be
  2. $32,000.
  3. $17,776.
  4. $8,000.
  5. $2,666.

 

 

 

  1. The interest charged on a $50,000, 60-day note payable, at the rate of 6%, would be
  2. $3,000.
  3. $1,667.
  4. $750.
  5. $500.

 

 

 

 

  1. The interest charged on a $90,000, 3-month note payable, at the rate of 8%, would be
  2. $7,200.
  3. $3,600.
  4. $1,800.
  5. $1,200.

 

 

 

  1. The interest charged on a $70,000, 2-month note payable, at the rate of 6%, would be
  2. $4,200.
  3. $2,100.
  4. $1,050.
  5. $700.

 

 

 

  1. On October 1, 2015, Pennington Company issued a $90,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2015, the adjusting entry for accrued interest will include a:
  2. credit to Notes Payable of $2,250.
  3. debit to Interest Expense of $2,250
  4. credit to Interest Payable of $4,500.
  5. debit to Interest Expense of $3,375.

 

 

 

  1. On October 1, 2014, Pennington Company issued a $90,000, 10%, nine-month interest-bearing note. Assuming interest was accrued in June 30, 2015, the entry to record the payment of the note on July 1, 2015, will include a:
  2. debit to Interest Expense of $2,250.
  3. credit to Cash of $90,000
  4. debit to Interest Payable of $6,750.
  5. debit to Notes Payable of $96,750.

 

 

 

  1. Crawford Company has total proceeds (before segregation of sales taxes) from sales of $7,155. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is:
  2. $7,155.
  3. $6,726.
  4. $7,584.
  5. $6,750.

 

 

 

 

  1. Reliable Insurance Company collected a premium of $36,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31?
  2. $0.
  3. $12,000.
  4. $24,000.
  5. $36,000.

 

 

 

  1. A company receives $265, of which $15 is for sales tax. The journal entry to record the sale would include a
  2. debit to Sales Tax Expense for $15.
  3. credit to Sales Taxes Payable for $15.
  4. debit to Sales Revenue for $265.
  5. debit to Cash for $250.

 

 

  1. A company receives $371, of which $21 is for sales tax. The journal entry to record the sale would include a

a    debit to Sales Tax Expense for $21.

  1. debit to Sales Taxes Payable for $21.
  2. debit to Sales Revenue for $371.
  3. debit to Cash for $371.

 

 

  1. A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $630,000, what is the amount of the sales taxes owed to the taxing agency?
  2. $600,000
  3. $630,000
  4. $31,500
  5. $30,000

 

 

 

  1. On January 1, 2015, Howard Company, a calendar-year company, issued $900,000 of notes payable, of which $225,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2015, is
  2. Current Liabilities, $900,000.
  3. Long-term Debt, $900,000.
  4. Current Liabilities, $450,000; Long-term Debt, $450,000.
  5. Current Liabilities, $225,000; Long-term Debt, $675,000.

 

 

 

 

  1. On January 1, 2015, Donahue Company, a calendar-year company, issued $600,000 of notes payable, of which $150,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2015, is
  2. Current Liabilities, $600,000.
  3. Long-term Debt , $600,000.
  4. Current Liabilities, $150,000; Long-term Debt, $450,000.
  5. Current Liabilities, $450,000; Long-term Debt, $150,000.

 

 

 

  1. A cash register tape shows cash sales of $1,800 and sales taxes of $126. The journal entry to record this information is
  2. Cash…………………………………………………………………………… 1,926

Sales Revenue………………………………………………………                               1,926

  1. Cash…………………………………………………………………………… 1,926

Sales Taxes Payable………………………………………………                                  126

Sales Revenue………………………………………………………                               1,800

  1. Cash…………………………………………………………………………… 1,800

Sales Tax Expense…………………………………………………………             126

Sales Revenue………………………………………………………                               1,926

  1. Cash…………………………………………………………………………… 1,926

Sales Revenue………………………………………………………                               1,800

Sales Taxes Revenue……………………………………………..                                  126

 

 

  1. Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed’s Bookstore make to show the April remittance?
  2. Sales Taxes Payable……………………………………………………… 750

Cash……………………………………………………………………                                  750

  1. Sales Tax Expense………………………………………………………… 750

Cash……………………………………………………………………                                  750

  1. Sales Tax Expense………………………………………………………… 750

Sales Taxes Payable………………………………………………                                  750

  1. No entry required.

 

 

  1. Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $29,400. If the sales tax rate is 5%, what amount must be remitted to the state for October’s sales taxes?
  2. $1,400
  3. $1,470
  4. $70
  5. It cannot be determined.

 

 

 

 

  1. Valerie’s Salon has total receipts for the month of $20,670 including sales taxes. If the sales tax rate is 6%, what are Valerie’s sales for the month?
  2. $19,637
  3. $21,910
  4. $19,500
  5. It cannot be determined.

 

 

 

  1. The amount of sales tax collected by a retail store when making sales is
  2. a miscellaneous revenue for the store.
  3. a current liability.
  4. not recorded because it is a tax paid by the customer.
  5. recorded as an operating expense.

 

 

  1. A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $294,000, what is the amount of the sales taxes owed to the taxing agency?
  2. $280,000
  3. $294,000
  4. $14,700
  5. $14,000

 

 

 

  1. Advances from customers are classified as a(n)
  2. revenue.
  3. expense.
  4. current asset.
  5. current liability.

 

 

  1. The current portion of long-term debt should
  2. be paid immediately.
  3. be reclassified as a current liability.
  4. be classified as a long-term liability.
  5. not be separated from the long-term portion of debt.

 

 

  1. Sales taxes collected by a retailer are expenses
  2. of the retailer.
  3. of the customers.
  4. of the government.
  5. that are not recognized by the retailer until they are submitted to the government.

 

 

 

  1. Sales taxes collected by a retailer are reported as
  2. contingent liabilities.
  3. revenues.
  4. expenses.
  5. current liabilities.

 

 

  1. Julie’s Boutique has total receipts for the month of $31,920 including sales taxes. If the sales tax rate is 5%, what are Julie’s sales for the month?
  2. $30,324
  3. $30,400
  4. $33,516
  5. It cannot be determined.

 

 

 

  1. A cash register tape shows cash sales of $3,500 and sales taxes of $210. The journal entry to record this information is
  2. Cash…………………………………………………………………………… 3,500

Sales Revenue………………………………………………………                               3,500

  1. Cash…………………………………………………………………………… 3,710

Sales Tax Revenue………………………………………………..                                  210

Sales Revenue………………………………………………………                               3,500

  1. Cash…………………………………………………………………………… 3,500

Sales Tax Expense…………………………………………………………             210

Sales Revenue………………………………………………………                               3,710

  1. Cash…………………………………………………………………………… 3,710

Sales Revenue………………………………………………………                               3,500

Sales Taxes Payable………………………………………………                                  210

 

 

  1. Jim’s Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim’s Pharmacy make to show the March remittance?
  2. Sales Tax Expense………………………………………………………… 600

Cash……………………………………………………………………                                  600

  1. Sales Taxes Payable……………………………………………………… 600

Cash……………………………………………………………………                                  600

  1. Sales Tax Expense………………………………………………………… 600

Sales Taxes Payable………………………………………………                                  600

  1. No entry required.

 

 

 

  1. Oakley Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $42,800. If the sales tax rate is 7%, what amount must be remitted to the state for February’s sales taxes?
  2. $2,996
  3. $2,800
  4. $4,280
  5. It cannot be determined.

 

 

 

  1. Any balance in an unearned revenue account is reported as a(n)
  2. current liability.
  3. long-term debt.
  4. revenue.
  5. unearned liability.

 

 

  1. Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 90,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?
  2. Subscriptions Receivable………………………………………………. 1,350,000

Subscription Revenue……………………………………………                        1,350,000

  1. Cash ………………………………………………………………………….. 1,350,000

Unearned Subscription Revenue……………………………..                        1,350,000

  1. Subscriptions Receivable………………………………………………. 225,000

Unearned Subscription Revenue……………………………..                           225,000

  1. Prepaid Subscriptions…………………………………………………… 1,350,000

Cash……………………………………………………………………                        1,350,000

 

 

 

  1. Hilton Company issued a four-year interest-bearing note payable for $600,000 on January 1, 2014. Each January the company is required to pay $150,000 on the note. How will this note be reported on the December 31, 2015 balance sheet?
  2. Long-term debt, $600,000.
  3. Long-term debt, $450,000.
  4. Long-term debt, $300,000; Long-term debt due within one year, $150,000.
  5. Long-term debt, $450,000; Long-term debt due within one year, $150,000.

 

 

 

  1. Kelly Rice has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Rice account for the cash received at the end of the engagement?
  2. Cash

Unearned Service Revenue

  1. Cash

Service Revenue

 

MC. 116      (Cont.)
  1. Prepaid Service Fees

Service Revenue

  1. No entry is required when the engagement is concluded.

 

 

  1. Which one of the following is shown first under current liabilities by many companies as a matter of custom?
  2. Accrued expenses
  3. Current maturities of long-term debt
  4. Sales taxes payable
  5. Notes payable

 

 

  1. Working capital is
  2. current assets plus current liabilities.
  3. current assets minus current liabilities.
  4. current assets divided by current liabilities.
  5. current assets multiplied by current liabilities.

 

 

  1. The current ratio is
  2. current assets plus current liabilities.
  3. current assets minus current liabilities.
  4. current assets divided by current liabilities.
  5. current assets multiplied by current liabilities.

 

 

  1. Hardy Company has current assets of $95,000, current liabilities of $100,000, long-term assets of $180,000 and long-term liabilities of $80,000. Hardy Company’s working capital and its current ratio are:
  2. $85,000 and .95:1.
  3. -$5,000 and 1.95:1.
  4. $5,000 and .95:1.
  5. -$5,000 and .95:1.

 

 

  1. Current liabilities generally appear
  2. after long-term debt on the balance sheet.
  3. in decreasing order of magnitude on the balance sheet.
  4. in order of maturity on the balance sheet.
  5. in increasing order of magnitude on the balance sheet.

 

 

 

  1. Employee payroll deductions include each of the following except
  2. federal unemployment taxes.
  3. federal income taxes.
  4. FICA taxes.
  5. insurance and pensions.

 

 

  1. Which one of the following payroll taxes does not result in a payroll tax expense for the employer?
  2. FICA tax
  3. Federal income tax
  4. Federal unemployment tax
  5. State unemployment tax

 

 

  1. Each of the following is correct regarding bonds except they are
  2. a form of interest-bearing notes payable.
  3. attractive to many investors.
  4. issued by corporations and governmental agencies.
  5. sold in large denominations.

 

 

  1. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
  2. bond interest is deductible for tax purposes.
  3. interest must be paid on a periodic basis regardless of earnings.
  4. income to stockholders may increase as a result of trading on the equity.
  5. the bondholders do not have voting rights.

 

 

  1. If a corporation issued $4,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
  2. $4,000,000
  3. $120,000
  4. $400,000
  5. $280,000

 

 

 

  1. Secured bonds are bonds that
  2. are in the possession of a bank.
  3. are registered in the name of the owner.
  4. have specific assets of the issuer pledged as collateral.
  5. have detachable interest coupons.

 

 

 

  1. A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called
  2. a bond indenture.
  3. a bond debenture.
  4. trading on the equity.
  5. a term bond.

 

 

  1. Stockholders of a company may be reluctant to finance expansion through issuing more equity because
  2. leveraging with debt is always a better idea.
  3. their earnings per share may decrease.
  4. the price of the stock will automatically decrease.
  5. dividends must be paid on a periodic basis.

 

 

  1. Which of the following is not an advantage of issuing bonds instead of common stock?
  2. Stockholder control is not affected.
  3. Earnings per share on common stock may be lower.
  4. Income to common stockholders may increase.
  5. Tax savings result.

 

 

  1. Bonds that are secured by real estate are termed
  2. mortgage bonds.
  3. convertible bonds.
  4. debentures.
  5. bearer bonds.

 

 

  1. Bonds issued against the general credit of the borrower are called
  2. callable bonds.
  3. debenture bonds.
  4. mortgage bonds.
  5. a sinking fund bond.

 

 

  1. Bonds that may be exchanged for common stock at the option of the bondholders are called
  2. options.
  3. stock bonds.
  4. convertible bonds.
  5. callable bonds.

 

 

  1. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called
  2. callable bonds.
  3. early retirement bonds.
  4. options.
  5. debentures.

 

  1. Bonds that have specific assets of the issuer pledged as collateral are
  2. secured bonds.
  3. callable bonds.
  4. convertible bonds.
  5. debenture bonds.

 

 

  1. A bond secured by specific assets set aside to redeem the bonds is called a
  2. convertible bond.
  3. sinking fund bond.
  4. mortgage bond.
  5. secured bond.

 

 

  1. The interest rate investors demand for loaning funds is the
  2. market interest rate.
  3. stated rate.
  4. contractual interest rate.
  5. bond interest rate.

 

 

  1. Companies with good credit ratings use _________________ bonds extensively.
  2. callable bonds.
  3. convertible bonds.
  4. mortgage bonds.
  5. debenture bonds.

 

 

  1. Corporations are granted the power to issue bonds through
  2. tax laws.
  3. state laws.
  4. federal security laws.
  5. bond debentures.

 

 

  1. The party who has the right to exercise a call option on bonds is the
  2. investment banker.
  3. bondholder.
  4. bearer.
  5. issuer.

 

 

  1. A major disadvantage resulting from the use of bonds is that
  2. earnings per share may be lowered.
  3. interest must be paid on a periodic basis.
  4. bondholders have voting rights.
  5. taxes may increase.

 

 

 

  1. All bonds will always fall into which one of the following pairs of categories?
  2. Secured or unsecured
  3. Mortgage or sinking fund
  4. Debenture or unsecured
  5. Callable or convertible

 

 

  1. Which of the following statements concerning bonds is not a true statement?
  2. Bonds are generally sold through an investment company.
  3. The bond indenture is prepared after the bonds are printed.
  4. The bond indenture and bond certificate are separate documents.
  5. The trustee keeps records of each bondholder.

 

 

  1. A bond trustee does not
  2. issue the bonds.
  3. keep a record of each bondholder.
  4. hold conditional title to pledged property.
  5. maintain custody of unsold bonds.

 

 

  1. The contractual interest rate is always stated as a(n)
  2. monthly rate.
  3. daily rate.
  4. semiannual rate.
  5. annual rate.

 

 

  1. When authorizing bonds to be issued, the board of directors does not specify the
  2. total number of bonds authorized to be sold.
  3. contractual interest rate.
  4. selling price.
  5. total face value of the bonds.

 

 

  1. The following exhibit is for Kmart bonds.

         Bonds                            Close               Yield              Volume           Net Change

Kmart 8 3/8   17                   100¼                 8.4                   35                   +7/8

The contractual interest rate of the K mart bonds is

  1. greater than the market interest rate.
  2. less than the market interest rate.
  3. equal to the market interest rate.
  4. not determinable.

 

 

 

  1. The following exhibit is for Kmart bonds.

         Bonds                            Close               Yield              Volume           Net Change

Kmart 8 3/8   17                   100¼                 8.4                   35                   +7/8

 

On the day of trading referred to above,

  1. no Kmart bonds were traded.
  2. bonds with market prices of $3,500 were traded.
  3. at closing, the selling price of the bond was higher than the previous day’s price.
  4. the bond sold for $100.25

 

 

  1. A $1,000 face value bond with a quoted price of 98 is selling for
  2. $1,000.
  3. $980.
  4. $908.
  5. $98.

 

 

 

  1. A bond with a face value of $200,000 and a quoted price of 102¼ has a selling price of
  2. $240,450.
  3. $204,050.
  4. $200,450.
  5. $204,500.

 

 

 

  1. Premium on Bonds Payable
  2. has a debit balance.
  3. is a contra account.
  4. is considered to be a reduction in the cost of borrowing.
  5. is deducted from bonds payable on the balance sheet.

 

 

  1. If the market interest rate is greater than the contractual interest rate, bonds will sell
  2. at a premium.
  3. at face value.
  4. at a discount.
  5. only after the stated interest rate is increased.

 

 

  1. On January 1, 2015, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 102. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2015 is
  2. Cash…………………………………………………………………………… 5,000,000

Bonds Payable……………………………………………………..                        5,000,000

 

  1. Cash…………………………………………………………………………… 5,100,000

Bonds Payable……………………………………………………..                        5,100,000

 


MC. 153      (Cont.)
  1. Premium on Bonds Payable…………………………………………… 100,000

Cash……………………………………………………………………………   5,000,000

Bonds Payable……………………………………………………..                        5,100,000

  1. Cash…………………………………………………………………………… 5,100,000

Bonds Payable……………………………………………………..                        5,000,000

Premium on Bonds Payable……………………………………                           100,000

 

 

  1. The total cost of borrowing is increased only if the
  2. bonds were issued at a premium.
  3. bonds were issued at a discount.
  4. bonds were sold at face value.
  5. market interest rate is less than the contractual interest rate on that date.

 

 

  1. If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell at an amount
  2. less than face value.
  3. equal to face value.
  4. greater than face value.
  5. that cannot be determined.

 

 

  1. The present value of a $10,000, 5-year bond, will be less than $10,000 if the
  2. contractual interest rate is less than the market interest rate.
  3. contractual interest rate is greater than the market interest rate.
  4. bond is convertible.
  5. contractual interest rate is equal to the market interest rate.

 

 

  1. Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 98. The journal entry to record the issuance will show a
  2. debit to Cash of $2,000,000.
  3. credit to Discount on Bonds Payable for $40,000.
  4. credit to Bonds Payable for $2,040,000.
  5. debit to Cash for $1,960,000.

 

 

 

  1. The market interest rate is often called the
  2. stated rate.
  3. effective rate.
  4. coupon rate.
  5. contractual rate.

 

 

 

  1. If bonds are issued at a discount, it means that the
  2. financial strength of the issuer is suspect.
  3. market interest rate is higher than the contractual interest rate.
  4. market interest rate is lower than the contractual interest rate.
  5. bondholder will receive effectively less interest than the contractual interest rate.

 

  1. Each of the following accounts is reported as long-term liabilities except
  2. Interest Payable.
  3. Bonds Payable.
  4. Discount on Bonds Payable.
  5. Premium on Bonds Payable.

 

 

  1. The statement that “Bond prices vary inversely with changes in the market interest rate” means that if the
  2. market interest rate increases, the contractual interest rate will decrease.
  3. contractual interest rate increases, then bond prices will go down.
  4. market interest rate decreases, then bond prices will go up.
  5. contractual interest rate increases, the market interest rate will decrease.

 

 

  1. The carrying value of bonds will equal the market price
  2. at the close of every trading day.
  3. at the end of the fiscal period.
  4. on the date of issuance.
  5. every six months on the date interest is paid.

 

 

  1. The sale of bonds above face value
  2. is a rare occurrence.
  3. will cause the total cost of borrowing to be less than the bond interest paid.
  4. will cause the total cost of borrowing to be more than the bond interest paid.
  5. will have no net effect on Interest Expense by the time the bonds mature.

 

 

  1. In the balance sheet the account Premium on Bonds Payable is
  2. added to Bonds Payable.
  3. deducted from Bonds Payable.
  4. classified as a stockholders’ equity account.
  5. classified as a revenue account.

 

 

  1. Four thousand bonds with a face value of $1,000 each, are sold at 105. The entry to record the issuance is
  2. Cash ………………………………………………………………………….. 4,200,000

Bonds Payable …………………………………………………….                        4,200,000

 

  1. Cash ………………………………………………………………………….. 4,000,000

Premium on Bonds Payable …………………………………………..      200,000

Bonds Payable …………………………………………………….                        4,200,000

 

MC. 165      (Cont.)
  1. Cash ………………………………………………………………………….. 4,200,000

Premium on Bonds Payable …………………………………..                           200,000

Bonds Payable …………………………………………………….                        4,000,000

 

  1. Cash ………………………………………………………………………….. 4,200,000

Discount on Bonds Payable ………………………………….                           200,000

Bonds Payable …………………………………………………….                        4,000,000

 

 

 

  1. Bond interest paid is
  2. higher when bonds sell at a discount.
  3. lower when bonds sell at a premium.
  4. the same whether bonds sell at a discount or a premium.
  5. higher when bonds sell at a discount and lower when bonds sell at a premium.

 

 

  1. Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 103. The journal entry to record the issuance will show a
  2. debit to Cash of $5,000,000.
  3. credit to Premium on Bonds Payable for $150,000.
  4. credit to Bonds Payable for $5,030,000.
  5. credit to Cash for $5,150,000.

 

 

 

  1. Lake Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2015. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization.

What is the amount of interest Lake must pay the bondholders in 2015?

  1. $11,200
  2. $12,000
  3. $13,200
  4. $10,800

 

 

 

  1. Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2013. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straight-line method of amortization.

Beonce Company decided to redeem the bonds on January 1, 2015. What amount of gain or loss would Beonce report on its 2015 income statement?


MC. 169      (Cont.)
  1. $9,600 gain
  2. $11,600 gain
  3. $11,600 loss
  4. $9,600 loss

 

 

 

  1. Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
  2. $4,600 gain
  3. $4,600 loss
  4. $15,000 gain
  5. $15,000 loss

 

 

 

  1. The current carrying value of Kane’s $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?
  2. $797,000
  3. $800,000
  4. $820,910
  5. $824,000

 

 

 

  1. Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a
  2. credit of $2,040 to Loss on Bond Redemption.
  3. debit of $2,040 to Loss on Bond Redemption.
  4. credit of $32,040 to Premium on Bonds Payable.
  5. debit of $32,000 to Premium on Bonds Payable.

 

 

 

  1. A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a
  2. gain on bond redemption of $12,000.
  3. loss on bond redemption of $10,000.
  4. loss on bond redemption of $12,000.
  5. gain on bond redemption of $10,000.

 

 

 

 

  1. If sixty $1,000 convertible bonds with a carrying value of $70,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is
  2. Bonds Payable ……………………………………………………………. 70,000

Common Stock ……………………………………………………                             70,000

 

  1. Bonds Payable ……………………………………………………………. 60,000

Premium on Bonds Payable …………………………………………..        10,000

Common Stock ……………………………………………………                             70,000

 

  1. Bonds Payable ……………………………………………………………. 60,000

Premium on Bonds Payable …………………………………………..        10,000

Common Stock ……………………………………………………                             45,000

Paid-in Capital in Excess of Par ……………………………..                             25,000

 

  1. Bonds Payable ……………………………………………………………. 70,000

Discount on Bonds Payable ………………………………….                             10,000

Common Stock ……………………………………………………                             45,000

Paid-in Capital in Excess of Par ……………………………..                             15,000

 

 

 

  1. A corporation recognizes a gain or loss
  2. only when bonds are converted into common stock.
  3. only when bonds are redeemed before maturity.
  4. when bonds are redeemed at or before maturity.
  5. when bonds are converted into common stock and when they are redeemed before maturity.

 

 

  1. If there is a loss on bonds redeemed early, it is
  2. debited directly to Retained Earnings.
  3. reported as an “Other Expense” on the income statement.
  4. reported as an “Extraordinary Item” on the income statement.
  5. debited to Interest Expense, as a cost of financing.

 

 

  1. If bonds can be converted into common stock,
  2. they will sell at a lower price than comparable bonds without a conversion feature.
  3. they will carry a higher interest rate than comparable bonds without the conversion feature.
  4. they will be converted only if the issuer calls them in for conversion.
  5. the bondholder may benefit if the market price of the common stock increases substantially.

 

 

 

  1. When bonds are converted into common stock,
  2. the market price of the stock on the date of conversion is credited to the Common Stock account.
  3. the market price of the bonds on the date of conversion is credited to the Common Stock account.
  4. the market price of the stock and the bonds is ignored when recording the conversion.
  5. gains or losses on the conversion are recognized.

 

 

  1. If bonds with a face value of $140,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to
  2. Bonds Payable for $140,000.
  3. Bonds Payable for $135,000.
  4. Discount on Bonds Payable for $5,000.
  5. Bonds Payable equal to the market price of the bonds on the date of conversion.

 

 

  1. A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000. The entry to record the retirement would include a
  2. gain on bond redemption of $10,000.
  3. loss on bond redemption of $10,000.
  4. loss on bond redemption of $2,000.
  5. gain on bond redemption of $2,000.

 

 

 

  1. Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is
  2. Bonds Payable ……………………………………………………………. 39,600

Common Stock ……………………………………………………                             20,000

Paid-in Capital in Excess of Par………………………………                             19,600

 

  1. Bonds Payable ……………………………………………………………. 30,000

Premium on Bonds Payable …………………………………………..          9,600

Common Stock ……………………………………………………                             30,000

Paid-in Capital in Excess of Par ……………………………..                               3,600

 

  1. Bonds Payable ……………………………………………………………. 30,000

Premium on Bonds Payable …………………………………………..          9,600

Common Stock ……………………………………………………                             20,000

Paid-in Capital in Excess of Par………………………………                             19,600

 

  1. Bonds Payable ……………………………………………………………. 39,600

Common Stock ……………………………………………………                             36,000

Paid-in Capital in Excess of Par………………………………                               3,600

 

 

 

 

  1. On March 31, 2015, $6,000,000 of 6%, 10-year bonds payable, dated December 31, 2014, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $6,072,000. Which of the following is correct?
  2. The bonds were issued at a premium.
  3. The amount of cash paid to bondholders on the next interest date, June 30, 2015, is $360,000.
  4. The amount of cash paid to bondholders on the next interest date, June 30, 2015, is $60,000.
  5. The bonds were issued at a discount.

 

 

 

  1. Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $20 million of these bonds it will report:
  2. A $1,400,000 gain.
  3. A $800,000 loss.
  4. An unrealized gain.
  5. Neither gains nor losses are recognized on early retirements of debt.

 

 

 

 

  1. On December 1, 2014, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2014. The portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is:
  2. $1,200.
  3. $1,212.
  4. $7,200.
  5. $5,988.

 

 

 

 

  1. Which one of the following amounts increases each period when accounting for long-term notes payable?
  2. Cash payment
  3. Interest expense
  4. Principal balance
  5. Reduction of principal

 

 

  1. In the balance sheet, mortgage notes payable are reported as
  2. a current liability only.
  3. a long-term liability only.
  4. both a current and a long-term liability.
  5. a current liability except for the reduction in principal amount.

 

 

 

 

  1. A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

Portion Allocated                        Portion Allocated

to Interest Expense                 to Payment of Principal

  1. Increases Increases
  2. Increases Decreases
  3. Decreases Decreases
  4. Decreases Increases

 

 

  1. The entry to record an installment payment on a long-term note payable is
  2. Mortgage Payable

Cash

  1. Interest Expense

Cash

  1. Mortgage Payable

Interest Expense

Cash

  1. Bonds Payable

Cash

 

 

  1. Winter Company purchased a building on January 2 by signing a long-term $630,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent.

The entry to record the first monthly payment will include a

  1. debit to the Cash account for $5,400.
  2. credit to the Cash account for $5,250.
  3. debit to the Interest Expense account for $5,250.
  4. credit to the Mortgage Payable account for $5,400.

 

 

 

  1. Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be
  2. $480,000.
  3. $479,500.
  4. $476,000.
  5. $475,500.

 

 

 

 

  1. Farris Company borrowed $800,000 from BankTwo on January 1, 2014 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Farris must recognize on its 2015 income statement?
  2. $68,000.
  3. $56,070.
  4. $43,127.
  5. $50,290.

 

 

 

  1. Farris Company borrowed $800,000 from BankTwo on January 1, 2014 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at January 1, 2016?
  2. $800,000
  3. $507,372
  4. $659,651
  5. $664,000

 

 

 

  1. Each of the following may be shown on a supporting schedule instead of on the balance sheet except the
  2. current maturities of long-term debt.
  3. conversion privileges.
  4. interest rates.
  5. maturity dates.

 

 

  1. The times interest earned is computed by dividing
  2. net income by interest expense.
  3. income before income taxes by interest expense.
  4. income before interest expense by interest expense.
  5. income before income taxes and interest expense by interest expense.

 

 

  1. The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

Premium on                    Discount on

Bonds Payable               Bonds Payable

  1. Add Add
  2. Deduct Add
  3. Add Deduct
  4. Deduct Deduct

 

 

 

  1. In a recent year Joey Corporation had net income of $150,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned for the year?
  2. 5.25
  3. 4.75
  4. 3.75
  5. 4.25

 

 

 

  1. In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10. What was Cold Corporation’s income before taxes for the year?
  2. $550,000
  3. $500,000
  4. $450,000
  5. None of the answers are correct.

 

 

 

  1. The adjusted trial balance for Lamar Corp. at the end of the current year, 2015, contained the following accounts.

5-year Bonds Payable 8%                                    $1,500,000

Interest Payable                                                           50,000

Premium on Bonds Payable                                       150,000

Notes Payable (3 mo.)                                                 40,000

Notes Payable (5 yr.)                                                145,000

Mortgage Payable ($10,000 due currently)               300,000

Salaries and Wages Payable                                         18,000

Taxes Payable (due 3/15 of 2016)                               25,000

The total long-term liabilities reported on the balance sheet are

  1. $1,945,000.
  2. $1,935,000.
  3. $2,095,000.
  4. $2,085,000.

 

 

 

  1. The 2015 financial statements of Marker Co. contain the following selected data (in millions).

Current Assets                      $ 75

Total Assets                           140

Current Liabilities                     40

Total Liabilities                         90

Cash                                            8


MC. 199      (Cont.)

The debt to assets ratio is

  1. 64.3%.
  2. 53.3%.
  3. 28.6%.
  4. 147.4%.

 

 

 

  1. The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders’ equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson’s debt to assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?
  2. The debt to assets ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.
  3. The debt to assets ratio will decrease from 4/36 before to 4/44 after the additional stock sale.
  4. The debt to assets ratio will increase from 40 before to 48 after the additional investment.
  5. The additional stock issuance will have no effect on the debt to assets ratio.

 

 

a 201.   The present value of a bond is also known as its

  1. face value.
  2. market price.
  3. future value.
  4. deferred value.

 

 

a 202.   $4 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of

  1. $320,000 received for 10 periods must be calculated.
  2. $4 million received in 10 periods must be calculated.
  3. $4 million received in 20 periods must be calculated.
  4. $160,000 received for 10 periods must be calculated.

 

 

a 203.   Either the straight-line method or the effective-interest method of amortization will always result in

  1. the same amount of interest expense being recognized over the term of the bonds.
  2. the same amount of interest expense being recognized each year.
  3. more interest expense being recognized than if premium or discounts were not amortized.
  4. the same carrying value each year during the term of the bonds.

 

 

 

a 204.   A corporation issued $600,000, 10%, 7-year bonds on January 1, 2015 for $648,666, which reflects an effective-interest rate of 7%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2015, is

  1. $30,000.
  2. $21,000.
  3. $32,434.
  4. $22,703.

 

 

 

a 205.   A bond discount must

  1. always be amortized using straight-line amortization.
  2. always be amortized using the effective-interest method.
  3. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method.
  4. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.

s

 

a 206.   When the effective-interest method of bond discount amortization is used,

  1. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date.
  2. the carrying value of the bonds will decrease each period.
  3. interest expense will not be a constant dollar amount over the life of the bond.
  4. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.

 

 

a 207.   When the effective-interest method of bond premium amortization is used, the

  1. amount of premium amortized will get larger with successive amortization.
  2. carrying value of the bonds will increase with successive amortization.
  3. interest paid to bondholders will increase after each interest payment date.
  4. interest rate used to calculate interest expense will be the contractual rate.

 

 

a 208.   Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is to be used. Interest is paid annually.

What amount of discount (to the nearest dollar) should be amortized for the first interest period?

  1. $4,770
  2. $6,133
  3. $7,732
  4. $3,867

 

 

 

 

a 209.   Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is to be used. Interest is paid annually.

The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a

  1. debit to Interest Expense for $35,000.
  2. credit to Cash for $38,867.
  3. credit to Discount on Bonds Payable for $3,867.
  4. debit to Interest Expense for $45,000.

 

 

 

a 210.   Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is to be used.

How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?

  1. $30,229
  2. $38,867
  3. $45,000
  4. $35,000

 

 

 

a 211.   On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,685,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of

  1. $283,500.
  2. $296,500.
  3. $286,650.
  4. $255,650.

 

 

 

a 212.   On January 1, Dade Corporation issued $3,000,000, 7%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 6%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for

  1. $180,000.
  2. $225,140.
  3. $192,977.
  4. $210,000.

 

 

 

 

a 213.   On January 1, Jorge Inc. issued $3,000,000, 8% bonds for $2,817,000. The market rate of interest for these bonds is 9%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of:

  1. $164,700.
  2. $169,470.
  3. $157,467.
  4. $153,000.

 

 

 

a 214.   On January 1, Runner Corporation issued $2,000,000, 13%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 11%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for:

  1. $130,000.
  2. $142,810.
  3. $120,839.
  4. $241,679.

 

 

 

a 215.   Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false?

  1. GAAP always requires use of the effective interest method.
  2. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used.
  3. Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method.
  4. The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense.

 

 

a 216.   On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 95 with interest payable on July 1 and January 1. The carrying value of the bonds, using straight-line amortization, at the end of the third interest period is:

  1. $965,000.
  2. $970,000.
  3. $930,000.
  4. $938,000.

 

 

 

a 217.   If bonds are originally sold at a discount using the straight-line amortization method:

  1. Interest expense in the earlier years of the bond’s life will be less than the interest to be paid.
  2. Interest expense in the earlier years of the bond’s life will be the same as interest to be paid.


MC. 217      (Cont.)
  1. Unamortized discount is subtracted from the face value of the bond to determine its carrying value.
  2. Unamortized discount is added to the face value of the bond to determine its carrying value.

 

 

a 218.   Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual straight-line amortization.

 

BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2014 $12,000 $312,000
January 1, 2015 (i) (ii) (iii) (iv) (v)

Which of the following amounts should be shown in cell (i)?

  1. $31,200
  2. $32,400
  3. $30,000
  4. $6,000

 

 

 

a 219.   Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual straight-line amortization.

 

BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2014 $12,000 $312,000
January 1, 2015 (i) (ii) (iii) (iv) (v)

 

Which of the following amounts should be shown in cell (ii)?

  1. $32,400
  2. $27,600
  3. $31,200
  4. $28,800

 

 

 

a 220.   Presented here is a partial amortization schedule for Roseland Company who sold $3000,000, five year 10% bonds on January 1, 2014 for $318,000 and uses annual straight-line amortization.

 

BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2014 $18,000 $318,000
January 1, 2015 (i) (ii) (iii) (iv) (v)

 


MC. 220      (Cont.)

Which of the following amounts should be shown in cell (iii)?

  1. $9,000.
  2. $18,000.
  3. $3,600.
  4. $1,800.

 

 

 

a 221.   Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2014 for $318,000 and uses annual straight-line amortization.

 

BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2014 $18,000 $318,000
January 1, 2015 (i) (ii) (iii) (iv) (v)

 

Which of the following amounts should be shown in cell (iv)?

  1. $16,200.
  2. $10,800.
  3. $21,600.
  4. $14,400.

 

 

 

a 222.   Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual straight-line amortization.

 

BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2014 $12,000 $312,000
January 1, 2015 (i) (ii) (iii) (iv) (v)

 

Which of the following amounts should be shown in cell (v)?

  1. $314,400
  2. $313,200
  3. $309,600
  4. $310,800

 

 

 

 

a 223.   On January 1, Health Corporation issues $3,000,000, 5-year, 8% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a

  1. debit to Interest Expense, $120,000.
  2. debit to Interest Expense, $240,000.
  3. credit to Discount on Bonds Payable, $12,000.
  4. credit to Discount on Bonds Payable, $24,000.

 

 

 

  1. 224. On January 1, 2015, $2,000,000, 10-year, 10% bonds, were issued for $1,946,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is
  2. $19,460.
  3. $5,400.
  4. $1,454.
  5. $450.

 

 

 

  1. A corporation issues $500,000, 8%, 5-year bonds on January 1, 2015, for $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2015’s adjusting entry is
  2. $44,200.
  3. $40,000.
  4. $35,800.
  5. $4,200.

 

 

 

a 226.   Stable Company issued $500,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds?

  1. $150,000
  2. $160,000
  3. $145,000
  4. $140,000

 

 

 

a 227.   Pakota Company issued $700,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

  1. $686,000
  2. $683,200
  3. $688,800
  4. $697,200

 

 

a 228.   Trendy Company issued $600,000 of 8%, 5-year bonds at 105. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

  1. $48,000
  2. $54,000
  3. $42,000
  4. $6,000

 

 

 

a 229.   Dart Company issued $600,000 of 8%, 5-year bonds at 105, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

  1. $630,000
  2. $627,000
  3. $624,000
  4. $633,000

 

 

 

a 230.   On January 1, 2015, $3,000,000, 5-year, 10% bonds, were issued for $2,916,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is

  1. $14,000.
  2. $16,800.
  3. $700.
  4. $1,400.

 

 

 

a 231.   A corporation issues $500,000, 8%, 5-year bonds on January 1, 2015 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight- line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2015 is

  1. $42,100.
  2. $20,000.
  3. $22,100.
  4. $17,900.

 

 

 

a 232.   Over the term of the bonds, the balance in the Discount on Bonds Payable account will

  1. fluctuate up and down if the market is volatile.
  2. decrease.
  3. increase.
  4. be unaffected until the bonds mature.

 

 


a 233.   Bond discount should be amortized to comply with

  1. the historical cost principle.
  2. the matching principle.
  3. the revenue recognition principle.
  4. conservatism.

 

 

a 234.   If bonds have been issued at a discount, over the life of the bonds, the

  1. carrying value of the bonds will decrease.
  2. carrying value of the bonds will increase.
  3. interest expense will increase, if the discount is being amortized on a straight-line basis.
  4. unamortized discount will increase.

 

 

a 235.   Hooke Company received proceeds of $377,000 on 10-year, 8% bonds issued on January 1, 2014. The bonds had a face value of $400,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Hooke uses the straight-line method of amortization.

What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2015?

  1. $32,000
  2. $30,160
  3. $34,300
  4. $29,700

 

 

 

a 236.   Jarmin Company received proceeds of $377,000 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Jarmin uses the straight-line method of amortization.

What is the carrying value of the bonds on January 1, 2015?

  1. $400,000
  2. $381,600
  3. $395,400
  4. $379,300

 

 

 

  1. A current liability is a debt the company reasonably expects to pay from existing current assets within
  2. one year.
  3. the operating cycle.
  4. one year or the operating cycle, whichever is longer.
  5. one year or the operating cycle, whichever is shorter.

 

 

 

  1. Which of the following statements concerning current liabilities is incorrect?
  2. Current liabilities include unearned revenues.
  3. A company that has more current liabilities than current assets is usually the subject of some concern.
  4. Current liabilities include prepaid expenses.
  5. A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.

 

 

  1. On August 1, 2014, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2015. How will the note payable and the related interest be classified in the December 31, 2014, balance sheet?

Note Payable                                Interest Payable

  1. Current liability Noncurrent liability
  2. Noncurrent liability Current liability
  3. Current liability Current liability
  4. Noncurrent liability Not shown

 

 

  1. Companies report current liabilities on the balance sheet in
  2. alphabetical order.
  3. order of maturity.
  4. random order.
  5. order of magnitude.

 

 

  1. The market value (present value) of a bond is a function of all of the following except the
  2. dollar amounts to be received.
  3. length of time until the amounts are received.
  4. market rate of interest.
  5. length of time until the bond is sold.

 

 

  1. On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits:

Bonds Payable                                    Discount on Bonds Payable

  1. $4,850,000 Cr. $0 Dr.
  2. $5,000,000 Cr. $150,000 Dr.
  3. $5,000,000 Cr. $1,250,000 Dr.
  4. $5,000,000 Cr. $15,000 Dr.

 

 

 

 

  1. The market rate of interest for a bond issue which sells for more than its face value is
  2. independent of the interest rate stated on the bond.
  3. higher than the interest rate stated on the bond.
  4. equal to the interest rate stated on the bond.
  5. less than the interest rate stated on the bond.

 

 

  1. When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the
  2. carrying value of the bonds.
  3. face value of the bonds.
  4. original selling price of the bonds.
  5. maturity value of the bonds.

 

 

  1. Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $800,000. The carrying value of the bonds at the redemption date is $842,000. The entry to record the redemption will include a
  2. credit of $42,000 to Loss on Bond Redemption.
  3. debit of $48,000 to Premium on Bonds Payable.
  4. credit of $7,000 to Gain on Bond Redemption.
  5. debit of $42,000 to Premium on Bonds Payable.

 

 

 

  1. Each payment on a mortgage note payable consists of
  2. interest on the original balance of the loan only.
  3. reduction of loan principal only.
  4. interest on the original balance of the loan and reduction of loan principal.
  5. interest on the unpaid balance of the loan and reduction of loan principal.

 

 

  1. The debt to assets ratio is computed by dividing
  2. long-term liabilities by total assets.
  3. total liabilities by total assets.
  4. total assets by total liabilities.
  5. total assets by long-term liabilities.

 

 

a 248.   The market price of a bond is the

  1. present value of its principal amount at maturity plus the present value of all future interest payments.
  2. principal amount plus the present value of all future interest payments.
  3. principal amount plus all future interest payments.
  4. present value of its principal amount only.

 

 

 

  1. Under IFRS, liabilities
  2. must be legally enforceable by a contract.
  3. must be legally enforceable by law.
  4. may be legally enforceable by a contract or law but need not be.
  5. are defined differently than under GAAP.

 

 

  1. When current liabilities are presented under IFRS, they are generally shown
  2. alphabetically.
  3. in order of magnitude.
  4. in order of the dates they become due.
  5. in order of liquidity.

 

 

  1. Which of the following statements about liabilities in incorrect?

Under IFRS, companies sometimes show

  1. liabilities before assets.
  2. long-term liabilities before current assets.
  3. current liabilities netted against current assets.
  4. liabilities in order of magnitude.

 

 

  1. The effective-interest method for amortization of bond discounts is required under
  2. GAAP only.
  3. IFRS only.
  4. Both GAAP and IFRS.
  5. Neither GAAP or IFRS.

 

 

  1. Under IFRS, the proceeds from the issuance of convertible debt are reported as
  2. debt only.
  3. equity only.
  4. debt or equity depending on the circumstances.
  5. both debt and equity.

 

 

  1. Under IFRS, companies do not use a
  2. discount account but do use a premium account.
  3. premium account but do use a discount account.
  4. bonds payable account.
  5. discount or premium account.

 

 


BRIEF EXERCISES

BE 255

Kingery Sales Company has the following selected accounts after posting adjusting entries:

Accounts Payable                                                                   $ 62,000

Notes Payable, 3-month                                                             50,000

Accumulated Depreciation—Equipment                                    14,000

Notes Payable, 5-year, 6%                                                         80,000

Payroll Tax Expense                                                                     4,000

Interest Payable                                                                            3,000

Mortgage Payable                                                                     120,000

Sales Taxes Payable                                                                    38,000

 

Instructions

Prepare the current liability section of Kingery Sales Company’s balance sheet, assuming $16,000 of the mortgage is payable next year.

 

 

BE 256

Identify which of the following would be classified as current liabilities as of December 31, 2014:

  1. Salaries and Wages Payable
  2. Bonds Payable, maturing in 2019
  3. Interest Payable, due July 1, 2015
  4. Sales Taxes Payable
  5. Notes Payable, due January 30, 2016

 

 

BE 257

On December 1, Gilman Corporation borrowed $20,000 on a 90-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note.

 

 

BE 258

During December 2014, Markowitz Publishing sold 4,500 12-month annual magazine subscriptions at a rate of $20 each. The first issues were mailed in February 2015. Prepare the entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first issues.

 

 

BE 259

Putman Company had cash sales of $75,950 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale.

 

BE 260

Layton Inc. is considering two alternatives to finance its construction of a new $5 million plant.

(a) Issuance of 500,000 shares of common stock at the market price of $10 per share.

(b) Issuance of $5 million, 9% bonds at par.

 

 

BE 260         (Cont.)

Instructions

Complete the following table.

Issue Stock                  Issue Bonds

Income before interest and taxes                                 $2,000,000                  $2,000,000

Interest expense from bonds                                       _________                  _________

 

Income before income taxes                                        $                                  $

 

Income tax expense (30%)                                          _________                  _________

 

Net income                                                                  $________                  $________

 

Outstanding shares                                                     _________                       700,000

 

Earnings per share                                                       _________                  _________

 

BE 261

On January 1, 2015, Morris Enterprises issued 9%, 5-year bonds with a face amount of $900,000 at par. Interest is payable semiannually on June 30 and December 31.

 

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment.

 

 

BE 262

On January 1, 2015, Bose Company issued bonds with a face value of $600,000. The bonds carry a stated interest of 7% payable each January 1 and July 1.

 

Instructions

  1. Prepare the journal entry for the issuance assuming the bonds are issued at 95.
  2. Prepare the journal entry for the issuance assuming the bonds are issued at 105.

 

BE 263

On July 1, 2015, Frog Corporation issued $800,000, 8%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1. Frog Corporation has a calendar year end.

 

Instructions

Prepare all entries related to the bond issue for 2015.

 

BE 264

On January 1, 2014, Zappa Enterprises sold 8%, 20-year bonds with a face amount of $1,200,000 for $1,140,000. Interest is payable semiannually on July 1 and January 1.

 

Instructions

Calculate the carrying value of the bond at December 31, 2014 and 2015.

 

BE 265

Queen Company issued bonds with a face amount of $2,000,000 in 2012. As of January 1, 2015, the balance in Discount on Bonds Payable is $6,000. At that time, Queen redeemed the bonds at 102.

 

Instructions

Assuming that no interest is payable, make the entry to record the redemption.

 

BE 266

Roxy Inc. issues a $1,500,000, 10%, 10-year mortgage note on December 31, 2015, to obtain financing for a new building. The terms provide for semiannual installment payments of $122,643.

 

Instructions

Prepare the entry to record the mortgage loan on December 31, 2015, and the first installment payment.

 

BE 267

Fresh Corporation reports the following selected financial statement information at December 31, 2015:

Total Assets                                          $120,000

Total Liabilities                                          75,000

Net Income                                                20,000

Interest Revenue                                          1,600

Interest Expense                                             800

Income Tax Expense                                       400

 

Instructions

Calculate the debt to assets and times interest earned ratios.

 

 

BE 268

On January 1, 2015, Tape Enterprises issued 9%, 10-year bonds with a face amount of $700,000 at 96. Interest is payable semiannually on June 30 and December 31. The bonds were issued for an effective interest rate of 10%.

 

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses effective-interest amortization.

 

 

BE 269

On January 1, 2015, Hogan Enterprises issued 8%, 20-year bonds with a face amount of $3,000,000 at 101. Interest is payable semiannually on June 30 and December 31.

 

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses straight-line amortization.

 

 


EXERCISES

Ex. 270

Howell Company has the following selected accounts after posting adjusting entries:

Accounts Payable                                                                $ 55,000

Notes Payable, 3-month                                                          70,000

Accumulated Depreciation—Equipment                                 14,000

FICA Taxes Payable                                                                27,000

Notes Payable, 5-year, 8%                                                      30,000

Warranty Liability                                                                   34,000

Payroll Tax Expense                                                                  6,000

Interest Payable                                                                         3,000

Mortgage Payable                                                                  200,000

Sales Taxes Payable                                                                 16,000

 

Instructions

Prepare the current liability section of Howell Company’s balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.)

 

 

Ex. 271

Prepare the necessary journal entries for the following transactions:

(a)   On September 1, Cole Company borrowed $300,000 from National Bank on a 6-month, 8% note.

(b)   On December 31, Cole Company accrued interest (assume adjusting entries are only made at the end of the year).

 

Ex. 272

On March 1, Jordan Company borrows $240,000 from Ottawa State Bank by signing a 6-month, 8%, interest-bearing note.

 

Instructions

Prepare the necessary entries below associated with the note payable on the books of Jordan Company.

(a)    Prepare the entry on March 1 when the note was issued.

(b)    Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made.

(c)    Prepare the adjusting entry at August 31 to accrue interest.

(d)    Prepare the entry to record payment of the note at maturity.

 

Ex. 273

Wellington Company had the following transactions involving notes payable.

 

Nov. 1, 2014         Borrows $180,000 from Olathe State Bank by signing a 3-month, 10% note.

Dec. 31, 2014        Prepares the adjusting entry.

Feb. 1, 2015          Pays principal and interest to Olathe State Bank.

 

Instructions

Prepare journal entries for each of the transactions.

 

 

Ex. 274

Flores Company publishes a monthly sports magazine, Hunting Preview. Subscriptions to the magazine cost $25 per year. During October 2014, Flores sells 30,000 subscriptions beginning with the November issue. Flores prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue.

 

Instructions

(a)     Prepare the entry in October for the receipt of the subscriptions.

(b)    Prepare the adjusting entry at December 31, 2014, to record subscription revenue earned in December 2014.

(c)     Prepare the adjusting entry at March 31, 2015, to record subscription revenue earned in the first quarter of 2015.

 

 

Ex. 275

English Company billed its customers a total of $1,785,000 for the month of November. The total includes a 5% state sales tax.

Instructions

(a)    Determine the proper amount of revenue to report for the month.

(b)    Prepare the general journal entry to record the revenue and related liabilities for the month.

 

Ex. 276

Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total for the month is $312,700, which includes a 6% sales tax.

 

Instructions

Compute sales taxes payable, and make the entry to record sales and sales taxes payable.

Ex. 277

Based on the following information, compute the (1) current ratio and (2) working capital.

Current assets          $200,000

Total assets                900,000

Current liabilities         80,000

Total liabilities           500,000

Ex. 278

Mehring’s 2015 financial statements contained the following data (in millions).

 

Current assets                   $17,890                 Accounts receivable                               $1,550

Total assets                       42,430                 Interest expense                                          980

Current liabilities              12,000                 Income tax expense                                  1,270

Total liabilities                  32,580                 Net income                                              2,230

Cash                                         380

 

Instructions

Compute these values:

(a)   Working capital.                          (b)    Current ratio.

 

 

 

Ex. 279

Golf Pro Publications publishes a golf magazine for women. The magazine sells for $3 a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During December 2014, Golf Pro Publications sells 12,000 copies of the golf magazine at newsstands and receives payment for 25,000 subscriptions for 2015. Financial statements are prepared monthly.

Instructions

(a)    Prepare the December 2014 journal entries to record the newsstand sales and subscriptions received.

(b)    Prepare the necessary adjusting entry on January 31, 2015. The January 2015 issue has been mailed to subscribers.

 

 

Ex. 280

Sophia Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.

(a)   Issue 400,000 shares of common stock at $10 per share.

(b)   Issue 7%, 10-year bonds at par ($4,000,000).

 

Income before interest and taxes is expected to be $3,500,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing.

 

Instructions

Calculate each of the following for each alternative:

(1)   Net income.

(2)   Earnings per share.

 

Ex. 281

The board of directors of Moore Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Moore Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 35%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased.

 

Instructions

Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.

 

Ex. 282

Slotkin Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

 

  1. Issue 60,000 shares of $10 par value common stock at $50 per share.
  2. Issue $3,000,000, 8%, 10-year bonds at par.

 

It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 40% and has 80,000 shares of common stock outstanding prior to the new financing.

 

Instructions

Determine the effect on net income and earnings per share for these two methods of financing.

 

 

Ex. 283

Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%.

     Plan 1                    Plan 2                    Plan 3   

9% Bonds                                                        —                          —                 $10,000,000

6% Preferred Stock, $100 par                         —                 $10,000,000              5,000,000

Common Stock, $10 par                         $20,000,000          10,000,000             5,000,000

Total                                                       $20,000,000          $20,000,000          $20,000,000

 

It is estimated that income before interest and taxes will be $5,000,000.

 

Instructions

Determine for each plan, the expected net income and the earnings per share on common stock.

 

Ex. 284

Korean Corporation issued $2 million, 10-year, 6% bonds on January 1, 2015.

 

Instructions

Prepare the entry to record the sale of these bonds, assuming they were issued at

(a)   98.

(b)   103.

 

Ex. 285

On January 1, 2015, Lost Corporation issued $900,000, 8%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Lost Corporation has a calendar year end.

 

Instructions

Prepare all entries related to the bond issue for 2015.

 

Ex. 286

On January 1, Focus Corporation issued $600,000, 6%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.

 

Instructions

Prepare journal entries to record the

(a)   Issuance of the bonds.

(b)   Payment of interest on July 1, assuming no previous accrual of interest.

(c)   Accrual of interest on December 31.

 

Ex. 287

The following section is taken from Blue Corp’s balance sheet at December 31, 2014.

Current liabilities

Interest Payable…………………………………………………… $   90,000

Long-term liabilities

Bonds Payable, 9%, due January 1, 2019 ………………. 2,000,000

 

Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.

 

Instructions

(a)  Journalize the payment of the bond interest on January 1, 2015.

  • Assume that on January 1, 2015, after paying interest, Blue calls bonds having a face value of $600,000. The call price is 106. Record the redemption of the bonds.
  • Prepare the entry to record the payment of interest on July 1, 2015, assuming no previous accrual of interest on the remaining bonds.

 

Ex. 288

Niebuhr Company issued $400,000 of bonds on January 1, 2015.

 

Instructions

  • Prepare the journal entry to record the retirement of the bonds at maturity, assuming the bonds were issued at 100.
  • Prepare the journal entry to record the retirement of the bonds before maturity at 97. Assume the balance in Premium on Bonds Payable is $4,000.
  • Prepare the journal entry to record the conversion of the bonds into 15,000 shares of $10 par value common stock. Assume the bonds were issued at par.

 

Ex. 289

Casey Company retired $500,000 face value, 9% bonds on June 30, 2015 at 96. The carrying value of the bonds at the redemption date was $508,000.

 

Instructions

Prepare the journal entry to record the redemption of the bonds.

 

Ex. 290

Presented below are three independent situations:

(a)    Strike Corporation purchased $380,000 of its bonds on June 30, 2015, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $371,500. The bonds pay semiannual interest and the interest payment due on June 30, 2015, has been made and recorded.

(b)    Worton, Inc. purchased $400,000 of its bonds at 96 on June 30, 2015, and immediately retired them. The carrying value of the bonds on the retirement date was $395,000. The bonds pay semiannual interest and the interest payment due on June 30, 2015, has been made and recorded.

(c)    Mountain Company has $80,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 40 shares of Mountain $4 par value common stock for each $1,000 par value bond. On December 31, 2015, after the bond interest has been paid, $30,000 par value of bonds were converted. The market value of Mountain’s common stock was $38 per share on December 31, 2013.

Instructions

For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.

 

Ex. 291

Douglas Company issued a $4,500,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2015. The terms provide for semiannual installment payments of $257,924.

 

Instructions

Prepare the entry to record:

(a)   the mortgage loan on December 31, 2015.

(b)   the first installment payment.

 

Ex. 292

Adams Corporation issues a $9,000,000, 5%, 20-year mortgage note payable on December 31, 2015, to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $289,409 on June 30 and December 31.

 

Instructions

(a)   Prepare the journal entries to record the mortgage loan on December 31, 2015, and the first installment payment.

(b)   Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment?

 

 

Ex. 293

Lucky Company borrowed $1,000,000 on January 1, 2015, by issuing $1,000,000, 8% mortgage note payable. The terms call for semiannual installment payments of $75,000 on June 30 and December 31.

Instructions

(a)   Prepare the journal entries to record the mortgage loan and the first two installment payments.

(b)   Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2015.

 

 

Ex. 294

The adjusted trial balance for Perry Corporation at the end of 2015 contained the following accounts:

Bonds payable, 10%……………………………………………………..          $800,000

Interest payable……………………………………………………………              20,000

Discount on bonds payable……………………………………………              40,000

Mortgage notes payable, 9%, due 2017…………………………..              90,000

Accounts payable…………………………………………………………            120,000

 

Instructions

(a)    Prepare the long-term liabilities section of the balance sheet.

(b)    Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

 

 

Ex. 295

Ranger Corporation reports the following amounts in their 2015 financial statements:

 

At December 31, 2015            For the Year 2015

 

Total assets                                                     $2,000,000

Total liabilities                                                1,310,000

Total stockholders’ equity                                        ?

Interest expense                                                                                        $25,000

Income tax expense                                                                                   130,000

Net income                                                                                                150,000

 

Instructions

(a)    Compute the December 31, 2013, balance in stockholders’ equity.

(b)    Compute the debt to assets ratio at December 31, 2015.

(c)    Compute times interest earned for 2015.

 

 
a Ex. 296

Boxer Corporation is issuing $800,000 of 8%, 5-year bonds when potential bond investors want a return of 10%. Interest is payable semiannually. The present value of 1 factors are 4%, .67556 and 5%, .61391. The present value of an annuity factors are 4%, 8.1109 and 5%, 7.72173.

 

Instructions

Compute the market price (present value) of the bonds.

 

a Ex. 297

On January 1, 2015, Plank Corporation issued $800,000, 6%, 5-year bonds for $735,110. The bonds were sold to yield an effective-interest rate of 8%. Interest is paid semiannually on June 30 and December 31. The company uses the effective-interest method of amortization.

 

Instructions

(a)   Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.)

(b)   Prepare the journal entries that Plank Corporation would make on January 1, June 30, and December 31, 2015, related to the bond issue.

 

 

a Ex. 298

On June 30, 2015, Upton, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated June 30, 2015, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2018. The following schedule was prepared by the accountant for 2015.

Semi-Annual           Interest to          Interest                                 Unamortized            Bond

Interest Period        be Paid            Expense        Amortization        Amount         Carrying Value

$75,000          $2,925,000

1                   $120,000           $131,625            $11,625               63,375            2,936,625

 

Instructions

On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.)

  1. What is the stated interest rate for this bond issue?
  2. What is the market interest rate for this bond issue?
  3. What was the selling price of the bonds as a percentage of the face value?
  4. Prepare the journal entry to record the sale of the bond issue on June 30, 2015.
  5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2015.

 

a Ex. 299

On January 1, 2015, Sunrise Corporation issued $4,000,000, 8%, 5-year bonds dated January 1, 2015, at 95. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end.

 

Instructions

Prepare all the journal entries that Sunrise Corporation would make related to this bond issue through January 1, 2016. Be sure to indicate the date on which the entries would be made.

 

a Ex. 300

Venture Company issued $900,000, 10%, 20-year bonds on January 1, 2015, at 103. Interest is payable semiannually on July 1 and January 1. Venture uses the straight-line method of amortization and has a calendar year end.

 

Instructions

Prepare all journal entries made in 2015 related to the bond issue.

 

a Ex. 301

Magic Company issued $500,000, 8%, 10-year bonds on December 31, 2014, for $470,000. Interest is payable semiannually on June 30 and December 31. Magic uses the straight-line method of amortization and has a calendar year end.

 

Instructions

Prepare the appropriate journal entries on

(a)     December 31, 2014.

(b)    June 30, 2015.

 

 

COMPLETION STATEMENTS

 

  1. A current liability is a debt that can be expected to be paid within ______________ year or the ______________, whichever is longer.

 

 

  1. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities.

 

 

  1. Obligations in written form are called ______________ and usually require the borrower to pay interest.

 

 

  1. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity.

 

 

  1. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency.

 

  1. The current ratio is current assets divided by ______________.

 

 

  1. Bonds that the issuing company can redeem at a stated dollar amount prior to maturity are ________________ bonds.

 

 

  1. The terms of a bond issue are set forth in a formal legal document called a bond ________________.

 

 

  1. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds.

 

 

  1. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate.

 

  1. Discount on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet.

 

 

  1. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate.

 

 

  1. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________.

 

 

  1. When bonds are converted into common stock and the conversion is recorded, the ________________ of the bonds is transferred to paid-in capital accounts.

 

 

a 316.   The market price of a bond is obtained by discounting to its present value the _______________ paid at maturity, and all _____________ payments to be made over the term of the bond.

 

 

a 317.   When there is a ________________ difference between the straight-line and effective-interest methods of amortization, the ________________ method is required under GAAP.

 

 

a 318.   A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method.

 

 

a319.    The straight-line method of amortization allocates the same amount to _______________ in each interest period.

 

 

MATCHING

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Serial bonds                                                      G.    Straight-line method of amortization
  2. Debenture bonds                                              H.    Bonds
  3. Bond indenture                                                 I.     Debt to assets ratio
  4. Premium on bonds payable                              J.     Current liability
  5. Discount on bonds payable                             K.    Current ratio
  6. Effective-interest method of amortization       L.    Registered bonds

 

_____   1.  A debt that can reasonably be expected to be paid from current assets.

 

_____   2.  A legal document that sets forth the terms of a bond issue.

 

_____   3.  Bonds that mature in installments.

 

_____ a 4.  Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds.

 

_____   5.  Bonds issued in the name of the owner.

 

_____   6.  A form of interest-bearing notes payable used by corporations.

 

_____   7.  Occurs when the contractual interest rate is greater than the market interest rate.

 

_____   8.  Unsecured bonds issued against the general credit of the borrower.

 

_____   9.  A measure of a company’s liquidity

 

_____ 10.  A solvency measure that indicates the percentage of assets provided by creditors.

 

_____ 11.  Occurs when the contractual interest rate is less than the market interest rate.

 

_____ a 12. Produces a periodic interest expense that is the same amount each interest period.

 


SHORT-ANSWER ESSAY QUESTIONS

S-A E 321

Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.

 

 

S-A E 322

When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss.

 

 

S-A E 323

Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption.

 

aS-A E 324

Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss.

 

 

aS-A E 325

Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying?

 

 

S-A E 326   (Ethics)

Hannah Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.

Required:

Is it ethical for a company to have a secret system like the one described? Explain.

 

 

S-A E 327   (Communication)

Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend’s bonds were issued at a discount, while Silver’s were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was—the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books.

 

Required:

Draft a short note for Susan to send to Lisa. Explain how such a result could occur.

 

 

 

CHALLENGE EXERCISES

CE 1

 

Wilkinson Company had the following transactions involving notes payable.

Aug. 1, 2014   Borrows $80,000 from City National Bank by signing a 9-month, 9% note.

Dec. 1, 2014    Borrows $90,000 from Admire State Bank by signing a 3-month, 10% note.

Dec. 31, 2014  Prepare adjusting entries.

Mar. 1, 2015   Pays principal and interest to Admire State Bank.

 

Instructions

(a)  Prepare journal entries for each of the transactions shown above.

(b) What amount of interest expense is reported in the 2014 income statement?

 


CE 2

 

Queen Company publishes a monthly fashion magazine, Tiara. Subscriptions to the magazine cost $30 per year. During October 2015, Queen sells 12,000 subscriptions beginning with the November issue. Queen prepares financial statements quarterly and recognizes subscription revenue earned at the end of quarter.

 

Instructions

(a)  Prepare the entry in October for the receipt of the subscriptions.

(b) Prepare the adjusting entry at December 31, 2015, to record subscription revenue earned in 2015.

(c)  Indicate the effect that the transactions in (a) and (b) have on assets, liabilities, and stockholders’ equity.

(d) Indicate how the unearned subscriptions are reported in the 12/31/15 financial statement, including the amount.

 

 

CE 3

 

The following section is taken from Gordon Corp. ‘s balance sheet at December 31, 2014.

 

Current liabilities

Interest payable                                              $   120,000

Long-term liabilities

Bonds payable, 6%, due January 1, 2019        4,000,000

Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.

 

Instuctions

(a)   Journal the payment of the bond interest on January 1, 2015.

(b)   Assume that on January 1, 2015, after paying interest, Gordon calls bonds having a face value of $1,600,000. The call price is 98. Record the redemption of the bonds.

(c)   Prepare the entry to record the payment of interest on July 1, 2015, assuming no previous accrual of interest on the remaining bonds.

(d)   Prepare the entry to record the retirement of half the bonds still outstanding on July 2, 2015 for a cash payment of $1,220,000.

 

 

 

 

 

 

 

 

Chapter 11

CORPORATIONS:ORGANIZATION, STOCK TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS

 

 

CHAPTER LEARNING OBJECTIVES

  1. Identify the major characteristics of a corporation.
  2. Record the issuance of common stock.
  3. Explain the accounting for treasury stock.
  4. Differentiate preferred stock from common stock.
  5. Prepare the entries for cash dividends and stock dividends.
  6. Identify the items reported in a retained earnings statement.
  7. Prepare and analyze a comprehensive stockholders’ equity section.

a8.  Describe the use and content of the stockholders’ equity statement.

a9.  Compute book value per share.

 

TRUE-FALSE STATEMENTS

  1. A corporation is not an entity which is separate and distinct from its owners.

 

 

  1. A corporation can be organized for the purpose of making a profit or it may be not-for-profit.

 

 

  1. A corporation acts under its own name rather than in the name of its stockholders.

 

  1. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.

 

 

  1. A corporation must be incorporated in each state in which it does business.

 

 

  1. A stockholder has the right to vote in the election of the board of directors.

 

 

  1. A proxy is a legal document that instructs a stockholder’s agent how to vote shares of stock for the stockholder.

 

 

  1. As soon as a corporation is authorized to issue stock, an accounting journal entry should be made recording the total value of the shares authorized.

 

 

  1. The par value of common stock must always be equal to its market value on the date the stock is issued.

 

 

  1. When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock becomes legal capital.

 

 

  1. A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares.

 

 

  1. The market value of a corporation’s stock is determined by the number of shares that the corporation has been authorized to issue.

 

 

  1. Stock can be issued only in exchange for cash.

 

 

  1. The par value of stock issued for noncash assets is never a factor in determining the cost of the assets received.

 

 

  1. The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.

 

 

  1. Treasury stock should not be classified as a current asset.

 

 

 

  1. Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.

 

 

  1. Treasury stock is a contra stockholders’ equity account.

 

 

  1. The number of common shares outstanding can never be greater than the number of shares issued.

 

 

  1. Preferred stock has contractual preference over common stock in certain areas.

 

 

  1. Preferred stockholders generally do not have the right to vote for the board of directors.

 

 

  1. Dividends in arrears on cumulative preferred stock are considered a liability.

 

 

  1. Dividends may be declared and paid in cash or stock.

 

 

  1. Cash dividends are not a liability of the corporation until they are declared by the board of directors.

 

 

  1. The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

 

 

  1. A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

 

 

  1. A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.

 

 

  1. Retained earnings represents the amount of cash available for dividends.

 

 

  1. Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

 

 

  1. A debit balance in the Retained Earnings account is identified as a deficit.

 

 

  1. A correction in income of a prior period involves either a debit or credit to the Retained Earnings account.

 

  1. Prior period adjustments to income are reported in the current year’s income statement.

 

 

  1. Retained earnings that are restricted are unavailable for dividends.

 

 

  1. Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

 

 

  1. A retained earnings statement shows the same information as a corporation income statement.

 

 

  1. A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

 

 

  1. Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders’ equity section of the balance sheet.

 

 

  1. Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.

 

 

  1. Many companies prepare a stockholders’ equity statement instead of presenting a detailed stockholders’ equity section in the balance sheet.

 

 

a40.     The stockholders’ equity statement shows the changes in each stockholders’ equity account and in total stockholders’ equity during the year.

 

 

a41.     Book value per share of common stock is the same amount as the market value per share.

 

 

 

  1. A successful corporation can have a continuous and perpetual life.

 

 

  1. Organizational costs are capitalized by debiting an intangible asset entitled Organization Costs.

 

 

  1. The cash proceeds from issuing par value stock may be equal to or greater than, but not less than par value.

 

 

  1. The cost of a noncash asset acquired in exchange for common stock should be either the fair value of the consideration given up or the consideration received, whichever is more clearly determinable.

 

 

  1. Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Stock when the shares are sold.

 

 

  1. A dividend based on paid-in capital is termed a liquidating dividend.

 

 

  1. Common Stock Dividends Distributable is reported as additional paid-in capital in the stockholders’ equity section.

 

 

  1. A prior period adjustment is reported as an adjustment of the beginning balance of Retained Earnings.

 

 

  1. In the stockholders’ equity section, paid-in capital and retained earnings are reported and the specific sources of paid-in capital are identified.

 

 

 

MULTIPLE CHOICE QUESTIONS

  1. Which one of the following is a privately held corporation?
  2. Intel
  3. General Electric
  4. Caterpillar Inc.
  5. Cargill Inc.

 

 

  1. The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is
  2. the sole proprietorship.
  3. the partnership.
  4. the corporation.
  5. not known.

 

 

  1. Under the corporate form of business organization
  2. a stockholder is personally liable for the debts of the corporation.
  3. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation.
  4. the corporation’s life is stipulated in its charter.
  5. stockholders wishing to sell their corporation shares must get the approval of other stockholders.

 

 

  1. Stockholders of a corporation directly elect
  2. the president of the corporation.
  3. the board of directors.
  4. the treasurer of the corporation.
  5. all of the employees of the corporation.

 

 

  1. The person responsible for maintaining the company’s cash position is the
  2. controller.
  3. treasurer.
  4. vice-president.
  5. president.

 

 

  1. A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a
  2. corporation is organized for the purpose of making a profit.
  3. corporation is subject to more federal and state government regulations.
  4. corporation is an accounting economic entity.
  5. corporation’s temporary accounts are closed at the end of the accounting period.

 

 

 

  1. Which one of the following would not be considered an advantage of the corporate form of organization?
  2. Limited liability of owners
  3. Separate legal existence
  4. Continuous life
  5. Government regulation

 

 

  1. The concept of an “artificial being” refers to which form of business organization?
  2. Partnership
  3. Sole proprietorship
  4. Corporation
  5. Limited partnership

 

 

  1. The two ways that a corporation can be classified by purpose are
  2. general and limited.
  3. profit and not-for-profit.
  4. state and federal.
  5. publicly held and privately held.

 

 

  1. The two ways that a corporation can be classified by ownership are
  2. publicly held and privately held.
  3. stock and non-stock.
  4. inside and outside.
  5. majority and minority.

 

 

  1. Which of the following would not be true of a privately held corporation?
  2. It is sometimes called a closely held corporation.
  3. Its shares are regularly traded on the New York Stock Exchange.
  4. It does not offer its shares for sale to the general public.
  5. It is usually smaller than a publicly held company.

 

 

  1. Which of the following is not true of a corporation?
  2. It may buy, own, and sell property.
  3. It may sue and be sued.
  4. The acts of its owners bind the corporation.
  5. It may enter into binding legal contracts in its own name.

 

 

  1. Jason Thomas has invested $200,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Thomas stand to lose?
  2. Up to his total investment of $200,000.
  3. Zero.
  4. The $200,000 plus any personal assets the creditors demand.
  5. $100,000.

 

 

  1. Which of the following statements reflects the transferability of ownership rights in a corporation?
  2. If a stockholder decides to transfer ownership, he must transfer all of his shares.
  3. A stockholder may dispose of part or all of his shares.
  4. A stockholder must obtain permission from the board of directors before selling shares.
  5. A stockholder must obtain permission from at least three other stockholders before selling shares.

 

 

  1. A corporate board of directors does not generally
  2. select officers.
  3. formulate operating policies.
  4. declare dividends.
  5. execute policy.

 

 

  1. A typical organization chart showing delegation of authority would show
  2. stockholders delegating to the board of directors.
  3. the board of directors delegating to stockholders.
  4. the chief executive officer delegating to the board of directors.
  5. the controller delegating to the chief executive officer.

 

 

  1. The officer who is generally responsible for maintaining the cash position of the corporation is the
  2. controller.
  3. treasurer.
  4. cashier.
  5. internal auditor.

 

 

  1. The chief accounting officer in a corporation is the
  2. treasurer.
  3. president.
  4. controller.
  5. vice-president of finance.

 

 

  1. The ability of a corporation to obtain capital is
  2. enhanced because of limited liability and ease of share transferability.
  3. less than a partnership.
  4. restricted because of the limited life of the corporation.
  5. about the same as a partnership.

 

 

 

  1. Which of the following statements concerning taxation is accurate?
  2. Partnerships pay state income taxes but not federal income taxes.
  3. Corporations pay federal income taxes but not state income taxes.
  4. Corporations pay federal and state income taxes.
  5. Only the owners must pay taxes on corporate income.

 

 

  1. Which of the following statements is not considered a disadvantage of the corporate form of organization?
  2. Additional taxes
  3. Government regulations
  4. Limited liability of stockholders
  5. Separation of ownership and management

 

 

  1. What is ordinarily the first step in the formation of a corporation?
  2. Development of by-laws for the corporation
  3. Issuance of the corporate charter
  4. Application for incorporation to the appropriate Secretary of State
  5. Registration with the SEC

 

 

  1. Which one of the following is not an ownership right of a stockholder in a corporation?
  2. To vote in the election of directors
  3. To declare dividends on the common stock
  4. To share in assets upon liquidation
  5. To share in corporate earnings

 

 

  1. If no-par stock is issued without a stated value, then
  2. the par value is automatically $1 per share.
  3. the entire proceeds are considered to be legal capital.
  4. there is no legal capital.
  5. the corporation is automatically in violation of its state charter.

 

 

  1. If a stockholder cannot attend a stockholder’s meeting, he may delegate his voting rights by means of
  2. an absentee ballot.
  3. a proxy.
  4. a certified letter.
  5. a telegram.

 

 

 

  1. If a corporation has only one class of stock, it is referred to as
  2. classless stock.
  3. preferred stock.
  4. solitary stock.
  5. common stock.

 

 

  1. The term residual claim refers to a stockholders’ right to
  2. receive dividends.
  3. share in assets upon liquidation.
  4. acquire additional shares when offered.
  5. exercise a proxy vote.

 

 

  1. Which of the following factors does not affect the initial market price of a stock?
  2. The company’s anticipated future earnings
  3. The par value of the stock
  4. The current state of the economy
  5. The expected dividend rate per share

 

 

  1. If an investment firm underwrites a stock issue, the
  2. risk of being unable to sell the shares stays with the issuing corporation.
  3. corporation obtains cash immediately from the investment firm.
  4. investment firm has guaranteed profits on the sale of the stock.
  5. issuance of stock is likely to be directly to creditors.

 

 

  1. The par value of a stock
  2. is legally significant.
  3. reflects the most recent market price.
  4. is selected by the SEC.
  5. is indicative of the worth of the stock.

 

 

  1. A corporation has the following account balances: Common stock, $1 par value, $60,000; Paid-in Capital in Excess of Par, $1,300,000. Based on this information, the
  2. legal capital is $1,360,000.
  3. number of shares issued are 60,000.
  4. number of shares outstanding are 1,360,000.
  5. average price per share issued is $22.50.

 

 

  1. The authorized stock of a corporation
  2. only reflects the initial capital needs of the company.
  3. is indicated in its by-laws.
  4. is indicated in its charter.
  5. must be recorded in a formal accounting entry.

 

 

  1. When stock is issued for legal services, the transaction is recorded by debiting Organization Expense for the
  2. stated value of the stock.
  3. par value of the stock.
  4. market value of the stock.
  5. book value of the stock.

 

 

  1. If Vickers Company issues 5,000 shares of $5 par value common stock for $175,000,
  2. Common Stock will be credited for $175,000.
  3. Paid-In Capital in Excess of Par will be credited for $25,000.
  4. Paid-In Capital in Excess of Par will be credited for $150,000.
  5. Cash will be debited for $150,000.

 

 

  1. If common stock is issued for an amount greater than par value, the excess should be credited to
  2. Cash.
  3. Retained Earnings.
  4. Paid-in Capital in Excess of Par.
  5. Legal Capital.

 

 

  1. If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at
  2. fair value.
  3. cost.
  4. zero.
  5. a nominal amount.

 

 

  1. If stock is issued for less than par value, the account
  2. Paid-In Capital in Excess of Par is credited.
  3. Paid-In Capital in Excess of Par is debited if a debit balance exists in the account.
  4. Paid-In Capital in Excess of Par is debited if a credit balance exists in the account.
  5. Retained Earnings is credited.

 

 

  1. The sale of common stock below par
  2. is a common occurrence in most states.
  3. is not permitted in most states.
  4. is a practice that most stockholders encourage.
  5. requires that a liability be recorded for the difference between the sales price and the par value of the shares.

 

 

  1. Paid-In Capital in Excess of Stated Value
  2. is credited when no-par stock does not have a stated value.
  3. is reported as part of paid-in capital on the balance sheet.
  4. represents the amount of legal capital.
  5. normally has a debit balance.

 

 

  1. A separate paid-in capital account is used to record each of the following except the issuance of
  2. no-par stock.
  3. par value stock.
  4. stated value stock.
  5. treasury stock above cost.

 

 

  1. Barton Company is a publicly held corporation whose $1 par value stock is actively traded at $31 per share. The company issued 3,000 shares of stock to acquire land recently advertised at $100,000. When recording this transaction, Barton Company will
  2. debit Land for $100,000.
  3. credit Common Stock for $93,000.
  4. debit Land for $93,000.
  5. credit Paid-In Capital in Excess of Par for $93,000.

 

 

 

  1. Crain Company issued 2,000 shares of its $5 par value common stock in payment of its attorney’s bill of $30,000. The bill was for services performed in helping the company incorporate. Crain should record this transaction by debiting
  2. Legal Expense for $10,000.
  3. Legal Expense for $30,000.
  4. Organization Expense for $10,000.
  5. Organization Expense for $30,000.

 

 

  1. In the financial statements, organization costs appears
  2. immediately below Retained Earnings in the stockholders’ equity section.
  3. in the income statement.
  4. as part of paid-in capital in the stockholders’ equity section.
  5. as an intangible asset.

 

 

  1. Which of the following represents the largest number of common shares?
  2. Treasury shares
  3. Issued shares
  4. Outstanding shares
  5. Authorized shares

 

 

  1. New Corp. issues 2,000 shares of $10 par value common stock at $16 per share. When the transaction is recorded, credits are made to
  2. Common Stock $20,000 and Paid-in Capital in Excess of Stated Value $12,000.
  3. Common Stock $32,000.
  4. Common Stock $20,000 and Paid-in Capital in Excess of Par $12,000.
  5. Common Stock $20,000 and Retained Earnings $12,000.

 

 

 

 

  1. If Keene Company issues 9,000 shares of $5 par value common stock for $160,000, the account
  2. Common Stock will be credited for $45,000.
  3. Paid-in Capital in Excess of Par will be credited for $45,000.
  4. Paid-in Capital in Excess of Par will be credited for $160,000.
  5. Cash will be debited for $115,000.

 

 

 

  1. Carson Packaging Corporation began business in 2015 by issuing 30,000 shares of $3 par common stock for $8 per share and 12,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $12. On its December 31, 2015 balance sheet, Carson Packaging would report
  2. Common Stock of $360,000.
  3. Common Stock of $90,000.
  4. Common Stock of $240,000.
  5. Paid-In Capital of $90,000.

 

 

 

  1. Hsu, Inc. issued 10,000 shares of stock at a stated value of $8/share. The total issue of stock sold for $15 per share. The journal entry to record this transaction would include a
  2. debit to Cash for $80,000.
  3. credit to Common Stock for $80,000.
  4. credit to Paid-in Capital in Excess of Par for $150,000.
  5. credit to Common Stock for $150,000.

 

 

 

  1. S. Lamar performed legal services for E. Garr. Due to a cash shortage, an agreement was reached whereby E. Garr. would pay S. Lamar a legal fee of approximately $12,000 by issuing 3,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $4.50 per share. Given this information, the journal entry for E. Garr. to record this transaction is:

 

  1. Legal Expense 12,000

Common Stock                                                                              12,000

 

  1. Legal Expense 12,000

Common Stock                                                                              12,000

 

  1. Legal Expense 12,000

Common Stock                                                                                3,000

Paid-in Capital in Excess of Par – Common                                    9,000

 

  1. Legal Expense 13,500

Common Stock                                                                                3,000

Paid-in Capital in Excess of Par – Common                                  10,500

 

 

 

 

  1. Jarrett Company issued 900 shares of no-par common stock for $13,200. Which of the following journal entries would be made if the stock has no stated value?

 

  1. Cash 13,200

Common Stock                                                                              13,200

 

  1. Cash 13,200

Common Stock                                                                                   900

Paid-in Capital in Excess of Par                                                       8,200

 

  1. Cash 13,200

Common Stock                                                                                   900

Paid-in Capital in Excess of Stated Value                                      12,300

 

  1. Common Stock 13,200

Cash                                                                                               13,200

 

 

  1. Darman Company issued 700 shares of no-par common stock for $7,700. Which of the following journal entries would be made if the stock has a stated value of $2 per share?
  2. Cash 7,700

Common Stock                                                                                7,700

 

  1. Cash 7,700

Common Stock                                                                                1,400

Paid-in Capital in Excess of Par                                                       6,300

 

  1. Cash 7,700

Common Stock                                                                                1,400

Paid-in Capital in Excess of Stated Value                                        6,300

 

  1. Common Stock 7,700

Cash                                                                                                 7,700

 

 

 

  1. Ralston Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ralston issues 9,000 shares of common stock to pay its recent attorney’s bill of $37,500 for legal services on a land access dispute, which of the following would be the journal entry for Ralston to record?
  2. Legal Expense 9,000

Common Stock                                                                                9,000

 

  1. Legal Expense 37,500

Common Stock                                                                              37,500

 

  1. Legal Expense 37,500

Common Stock                                                                                9,000

Paid-in Capital in Excess of Stated Value – Common                   28,500

 


MC. 102      (Cont.)
  1. Legal Expense 37,500

Common Stock                                                                                9,000

Paid-in Capital in Excess of Par – Preferred                                  28,500

 

 

 

  1. The following data is available for Blaine Corporation at December 31, 2015:

Common stock, par $10 (authorized 30,000 shares)           $250,000

Treasury Stock (at cost $15 per share)                                        900

Based on the data, how many shares of common stock are outstanding?

  1. 30,000
  2. 25,000
  3. 29,940
  4. 24,940

 

 

 

  1. The following data is available for Blaine Corporation at December 31, 2015:

Common stock, par $10 (authorized 30,000 shares)           $250,000

Treasury Stock (at cost $15 per share)                                     $ 900

Based on the data, how many shares of common stock have been issued?

  1. 30,000
  2. 25,000
  3. 29,940
  4. 24,940

 

 

 

  1. Aaron, Inc. paid $120,000 to buy back 10,000 shares of its $1 par value common stock. This stock was sold later at a selling price of $8 per share. The entry to record the sale includes a
  2. debit to Retained Earnings for $40,000.
  3. credit to Retained Earnings for $10,000.
  4. debit to Paid-in Capital from Treasury Stock for $120,000.
  5. credit to Paid-in Capital from Treasury Stock for $10,000.

 

 

 

 

  1. Karl Corporation was organized on January 2, 2015. During 2015, Karl issued 40,000 shares at $24 per share, purchased 6,000 shares of treasury stock at $26 per share, and had net income of $600,000. What is the total amount of stockholders’ equity at December 31, 2015?
  2. $1,280,000
  3. $1,404,000
  4. $1,416,000
  5. $1,440,000

 

 

 

  1. Evergreen Manufacturing Corporation purchased 5,000 shares of its own previously issued $10 par common stock for $115,000. As a result of this event,
  2. Evergreen’s Common Stock account decreased $50,000.
  3. Evergreen’s total stockholders’ equity decreased $115,000.
  4. Evergreen’s Paid-in Capital in Excess of Par account decreased $65,000.
  5. All of these answers are correct.

 

 

  1. A corporation purchases 40,000 shares of its own $30 par common stock for $45 per share, recording it at cost. What will be the effect on total stockholders’ equity?
  2. Increase by $1,800,000
  3. Decrease by $1,200,000
  4. Decrease by $1,800,000
  5. Increase by $1,200,000

 

 

 

  1. A corporation purchases 30,000 shares of its own $15 par common stock for $30 per share, recording it at cost. What will be the effect on total stockholders’ equity?
  2. Increase by $450,000
  3. Decrease by $900,000
  4. Increase by $900,000
  5. Decrease by $450,000

 

 

  1. Ramos Corporation sold 400 shares of treasury stock for $45 per share. The cost for the shares was $35. The entry to record the sale will include a
  2. credit to Gain on Sale of Treasury Stock for $14,000.
  3. credit to Paid-in Capital from Treasury Stock for $4,000.
  4. debit to Paid-in Capital in Excess of Par for $4,000.
  5. credit to Treasury Stock for $18,000.

 

 

 

 

  1. Each of the following is correct regarding treasury stock except that it has been
  2. issued.
  3. fully paid for.
  4. reacquired.
  5. retired.

 

 

  1. Treasury stock is
  2. stock issued by the U.S. Treasury Department.
  3. stock purchased by a corporation and held as an investment in its treasury.
  4. corporate stock issued by the treasurer of a company.
  5. a corporation’s own stock which has been reacquired but not retired.

 

 

  1. The acquisition of treasury stock by a corporation
  2. increases its total assets and total stockholders’ equity.
  3. decreases its total assets and total stockholders’ equity.
  4. has no effect on total assets and total stockholders’ equity.
  5. requires that a gain or loss be recognized on the income statement.

 

 

  1. Treasury stock should be reported in the financial statements of a corporation as a(n)
  2. investment.
  3. liability.
  4. deduction from total paid-in capital.
  5. deduction from total paid-in capital and retained earnings.

 

 

  1. A company would not acquire treasury stock
  2. in order to reissue shares to officers.
  3. as an asset investment.
  4. in order to increase trading of the company’s stock.
  5. to have additional shares available to use in acquisitions of other companies.

 

 

  1. Accounting for treasury stock is done by the
  2. FIFO method.
  3. LIFO method.
  4. cost method.
  5. lower of cost or market method.

 

 

  1. Treasury stock is generally accounted for by the
  2. cost method.
  3. market value method.
  4. par value method.
  5. stated value method.

 

 

 

  1. Treasury Stock is a(n)
  2. contra asset account.
  3. retained earnings account.
  4. asset account.
  5. contra stockholders’ equity account.

 

 

  1. Seven thousand shares of treasury stock of Marker, Inc., previously acquired at $14 per share, are sold at $20 per share. The entry to record this transaction will include a
  2. credit to Treasury Stock for $140,000.
  3. debit to Paid-In Capital from Treasury Stock for $42,000.
  4. debit to Treasury Stock for $98,000.
  5. credit to Paid-In Capital from Treasury Stock for $42,000.

 

 

 

  1. Salon Company originally issued 4,000 shares of $10 par value common stock for $120,000 ($30 per share). Salon subsequently purchases 400 shares of treasury stock for $27 per share and resells the 400 shares of treasury stock for $29 per share. In the entry to record the sale of the treasury stock, there will be a
  2. credit to Common Stock for $10,800.
  3. credit to Treasury Stock for $4,000.
  4. debit to Paid-In Capital in Excess of Par of $12,000.
  5. credit to Paid-In Capital from Treasury Stock for $800.

 

 

 

  1. Brown Company has 1,000 shares of 5%, $100 par cumulative preferred stock outstanding at December 31, 2015. No dividends have been paid on this stock for 2014 or 2015. Dividends in arrears at December 31, 2015 total
  2. $0.
  3. $500.
  4. $5,000.
  5. $10,000.

 

 

 

  1. Era Company has 3,000 shares of 6%, $100 par non-cumulative preferred stock outstanding at December 31, 2015. No dividends have been paid on this stock for 2014 or 2015. Dividends in arrears at December 31, 2015 total
  2. $0.
  3. $1,800.
  4. $18,000.
  5. $36,000.

 

 

 

 

  1. Ranier Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ranier issues 5,000 shares of preferred stock for land with an asking price of $575,000 and a market value of $550,000, which of the following would be the journal entry for Ranier to record?
  2. Land 500,000

Preferred Stock                                                                            500,000

  1. Land 550,000

Preferred Stock                                                                            550,000

  1. Land 575,000

Preferred Stock                                                                            500,000

Paid-in Capital in Excess of Par-Preferred                                     75,000

  1. Land 550,000

Preferred Stock                                                                            500,000

Paid-in Capital Excess of Par-Preferred                                         50,000

 

 

 

  1. Lakeland, Inc. has 25,000 shares of 6%, $100 par value, noncumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2015. There were no dividends declared in 2014. The board of directors declares and pays a $250,000 dividend in 2015. What is the amount of dividends received by the common stockholders in 2015?
  2. $0
  3. $150,000
  4. $250,000
  5. $100,000

 

 

 

  1. When preferred stock is cumulative, preferred dividends not declared in a period are
  2. considered a liability.
  3. called dividends in arrears.
  4. distributions of earnings.
  5. never paid.

 

 

  1. Which of the following is not a right or preference associated with preferred stock?
  2. The right to vote
  3. First claim to dividends
  4. Preference to corporate assets in case of liquidation
  5. To receive dividends in arrears before common stockholders receive dividends

 

 

  1. Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $80 per share. The entry to record the transaction will consist of a debit to Cash for $800,000 and a credit or credits to
  2. Preferred Stock for $800,000.
  3. Preferred Stock for $500,000 and Paid-in Capital in Excess of Par—Preferred Stock for $300,000.


MC. 127      (Cont.)
  1. Preferred Stock for $300,000 and Paid-in Capital from Preferred Stock for $500,000.
  2. Paid-in Capital from Preferred Stock for $800,000.

 

 

  1. Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders’ equity section, the effects of the transaction above will be reported
  2. entirely within the capital stock section.
  3. entirely within the additional paid-in capital section.
  4. under both the capital stock and additional paid-in capital sections.
  5. entirely under the retained earnings section.

 

 

  1. Dividends in arrears on cumulative preferred stock
  2. are shown in stockholders’ equity of the balance sheet.
  3. must be paid before common stockholders can receive a dividend.
  4. should be recorded as a current liability until they are paid.
  5. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.

 

 

  1. Dividends in arrears on cumulative preferred stock
  2. are considered to be a non-current liability.
  3. are considered to be a current liability.
  4. only occur when preferred dividends have been declared.
  5. should be disclosed in the notes to the financial statements.

 

 

  1. If preferred stock is cumulative, the
  2. preferred dividends not declared in a given year are called dividends in arrears.
  3. preferred stockholders and the common stockholders receive equal dividends.
  4. preferred stockholders and the common stockholders receive the same total dollar amount of dividends.
  5. common stockholders will share in the preferred dividends.

 

 

  1. The Northern Corporation issues 7,000 shares of $100 par value preferred stock for cash at $120 per share. The entry to record the transaction will consist of a debit to Cash for $840,000 and a credit or credits to
  2. Preferred Stock for $840,000.
  3. Paid-in Capital from Preferred Stock for $840,000.
  4. Preferred Stock for $700,000 and Retained Earnings for $140,000.
  5. Preferred Stock for $700,000 and Paid-in Capital in Excess of Par—Preferred Stock for $140,000.

 

 

 

 

  1. Vega Corporation’s December 31, 2015 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares

authorized; 7,500 shares issued                                                    $   150,000

Common stock, $10 par value, 1,000,000 shares authorized;

975,000 shares issued, 960,000 shares outstanding                       9,750,000

Paid-in capital in excess of par—preferred stock                                            30,000

Paid-in capital in excess of par—common stock                                      13,500,000

Retained earnings                                                                                        3,750,000

Treasury stock (15,000 shares)                                                                     315,000

Vega declared and paid a $58,000 cash dividend on December 15, 2015. If the company’s dividends in arrears prior to that date were $10,000, Vega’s common stockholders received

  1. $48,000.
  2. $22,000.
  3. $36,000.
  4. no dividend.

 

 

 

  1. Each of the following decreases retained earnings except a
  2. cash dividend.
  3. liquidating dividend.
  4. stock dividend.
  5. All of these decrease retained earnings.

 

 

  1. Each of the following decreases total stockholders’ equity except a
  2. cash dividend.
  3. liquidating dividend.
  4. stock dividend.
  5. All of these decrease total stockholders’ equity.

 

 

  1. Which one of the following is not necessary in order for a corporation to pay a cash dividend?
  2. Adequate cash
  3. Approval of stockholders
  4. Declaration of dividends by the board of directors
  5. Retained earnings

 

 

  1. If a corporation declares a dividend based upon paid-in capital, it is known as a
  2. scrip dividend.
  3. property dividend.
  4. paid dividend.
  5. liquidating dividend.

 

 

 

  1. The date on which a cash dividend becomes a binding legal obligation is on the
  2. declaration date.
  3. date of record.
  4. payment date.
  5. last day of the fiscal year-end.

 

 

  1. The effect of the declaration of a cash dividend by the board of directors is to

          Increase                                         Decrease        

  1. Stockholders’ equity Assets
  2. Assets Liabilities
  3. Liabilities Stockholders’ equity
  4. Liabilities Assets

 

 

  1. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to
  2. decrease total liabilities and stockholders’ equity.
  3. increase total expenses and total liabilities.
  4. increase total assets and stockholders’ equity.
  5. decrease total assets and stockholders’ equity.

 

 

  1. Common Stock Dividends Distributable is classified as a(n)
  2. asset account.
  3. stockholders’ equity account.
  4. expense account.
  5. liability account.

 

 

  1. The effect of a stock dividend is to
  2. decrease total assets and stockholders’ equity.
  3. change the composition of stockholders’ equity.
  4. decrease total assets and total liabilities.
  5. increase the book value per share of common stock.

 

  1. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is
  2. Common Stock Dividends Distributable.
  3. Common Stock.
  4. Paid-in Capital in Excess of Par.
  5. Retained Earnings.

 

 

 

  1. Which one of the following events would not require a formal journal entry on a corporation’s books?
  2. 2 for 1 stock split
  3. 100% stock dividend
  4. 2% stock dividend
  5. $1 per share cash dividend

 

 

  1. Stock dividends and stock splits have the following effects on retained earnings:

Stock Splits         Stock Dividends

  1. Increase No change
  2. No change Decrease
  3. Decrease Decrease
  4. No change No change

 

 

  1. Dividends are predominantly paid in
  2. earnings.
  3. property.
  4. cash.
  5. stock.

 

 

  1. If a stockholder receives a dividend that reduces retained earnings by the fair value of the stock, the stockholder has received a
  2. large stock dividend.
  3. cash dividend.
  4. contingent dividend.
  5. small stock dividend.

 

 

  1. Of the various dividends types, the two most common types in practice are
  2. cash and large stock.
  3. cash and property.
  4. cash and small stock.
  5. property and small stock.

 

 

  1. Regular dividends are declared out of
  2. Paid-in Capital in Excess of Par.
  3. Treasury Stock.
  4. Common Stock.
  5. Retained Earnings.

 

 

 

  1. A corporation is not committed to a legal obligation when it declares
  2. a cash dividend.
  3. either a cash dividend or a stock dividend.
  4. a stock dividend.
  5. a distribution date.

 

 

  1. Which of the following is not a significant date with respect to dividends?
  2. The declaration date
  3. The incorporation date
  4. The record date
  5. The payment date

 

 

  1. On the dividend record date,
  2. a dividend becomes a current obligation.
  3. no entry is required.
  4. an entry may be required if it is a stock dividend.
  5. Dividends Payable is debited.

 

 

  1. Which of the following statements regarding the date of a cash dividend declaration is not accurate?
  2. The dividend can be rescinded once it has been declared.
  3. The corporation is committed to a legal, binding obligation.
  4. The board of directors formally authorizes the cash dividend.
  5. A liability account must be increased.

 

 

  1. Dividends Payable is classified as a
  2. long-term liability.
  3. contra stockholders’ equity account to Retained Earnings.
  4. current liability.
  5. stockholders’ equity account.

 

 

  1. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:

Total Assets      Total Liabilities     Total Stockholders’ Equity

  1. Increase Decrease                         No change
  2. No change Increase                           Decrease
  3. Decrease Increase                           Decrease
  4. Decrease No change                          Increase

 

 

 

  1. Which of the following statements about dividends is not accurate?
  2. Many companies declare and pay cash quarterly dividends.
  3. Low dividends may mean high stock returns.
  4. The board of directors is obligated to declare dividends.
  5. A legal dividend may not be a feasible one.

 

 

  1. The cumulative effect of the declaration and payment of a cash dividend on a company’s balance sheet is to
  2. decrease current liabilities and stockholders’ equity.
  3. increase total assets and stockholders’ equity.
  4. increase current liabilities and stockholders’ equity.
  5. decrease stockholders’ equity and total assets.

 

 

  1. The declaration and distribution of a stock dividend will
  2. increase total stockholders’ equity.
  3. increase total assets.
  4. decrease total assets.
  5. have no effect on total assets.

 

 

  1. Xeris, Inc. has 1,000 shares of 6%, $10 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2015. What is the annual dividend on the preferred stock?
  2. $6 per share
  3. $600 in total
  4. $6,000 in total
  5. $.06 per share

 

 

  1. Win, Inc. has 10,000 shares of 7%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2015. If the board of directors declares a $70,000 dividend, the
  2. preferred shareholders will receive 1/10th of what the common shareholders will receive.
  3. preferred shareholders will receive the entire $70,000.
  4. $70,000 will be held as restricted retained earnings and paid out at some future date.
  5. preferred shareholders will receive $35,000 and the common shareholders will receive $35,000.

 

 

 

  1. Marion, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2015. There were no dividends declared in 2014. The board of directors declares and pays a $65,000 dividend in 2015. What is the amount of dividends received by the common stockholders in 2015?
  2. $0
  3. $25,000
  4. $65,000
  5. $40,000

 

 

 

  1. Library, Inc. has 2,500 shares of 4%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2014, and December 31, 2015. The board of directors declared and paid a $3,000 dividend in 2014. In 2015, $18,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2015?

Preferred               Common

  1. $11,000 $7,000
  2. $9,000 $9,000
  3. $7,000 $11,000
  4. $5,000 $13,000

 

 

 

  1. Township, Inc. has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2014, and December 31, 2015. The board of directors declared and paid a $50,000 dividend in 2014. In 2015, $110,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2015?

Preferred               Common

  1. $0 $110,000
  2. $50,000 $60,000
  3. $55,000 $55,000
  4. $70,000 $40,000

 

 

 

  1. The board of directors must assign a per share value to a stock dividend declared that is
  2. greater than the par or stated value.
  3. less than the par or stated value.
  4. equal to the par or stated value.
  5. at least equal to the par or stated value.

 

 

 

  1. Corporations generally issue stock dividends in order to
  2. increase the market price per share.
  3. exceed stockholders’ dividend expectations.
  4. increase the marketability of the stock.
  5. decrease the amount of capital in the corporation.

 

 

  1. A stockholder who receives a stock dividend would
  2. expect the market price per share to increase.
  3. own more shares of stock.
  4. expect retained earnings to increase.
  5. expect the par value of the stock to change.

 

 

  1. When stock dividends are distributed,
  2. Common Stock Dividends Distributable is decreased.
  3. Retained Earnings is decreased.
  4. Paid-in Capital in Excess of Par is debited if it is a small stock dividend.
  5. no entry is necessary if it is a large stock dividend.

 

 

  1. A small stock dividend is defined as
  2. less than 30% but greater than 25% of the corporation’s issued stock.
  3. between 50% and 100% of the corporation’s issued stock.
  4. more than 30% of the corporation’s issued stock.
  5. less than 20–25% of the corporation’s issued stock.

 

 

  1. The per share amount normally assigned by the board of directors to a large stock dividend is
  2. the market value of the stock on the date of declaration.
  3. the average price paid by stockholders on outstanding shares.
  4. the par or stated value of the stock.
  5. zero.

 

 

  1. The per share amount normally assigned by the board of directors to a small stock dividend is
  2. the market value of the stock on the date of declaration.
  3. the average price paid by stockholders on outstanding shares.
  4. the par or stated value of the stock.
  5. zero.

 

 

 

  1. Identify the effect the declaration and distribution of a stock dividend has on the par value per share.

Par Value per Share

  1. Increase
  2. Decrease
  3. Increase or decrease
  4. No effect

 

 

  1. The declaration of a stock dividend will
  2. increase paid-in capital.
  3. change the total of stockholders’ equity.
  4. increase total liabilities.
  5. increase total assets.

 

 

  1. Which of the following show the proper effect of a stock split and a stock dividend?

               Item                            Stock Split                  Stock Dividend

  1. Total paid-in capital Increase                          Increase
  2. Total retained earnings Decrease                         Decrease
  3. Total par value (common) Decrease                         Increase
  4. Par value per share Decrease                       No change

 

 

  1. A stock split
  2. may occur in the absence of retained earnings.
  3. will increase total paid-in capital.
  4. will increase the total par value of the stock.
  5. will have no effect on the par value per share of stock.

 

 

  1. Outstanding stock of the Zone Corporation included 20,000 shares of $5 par common stock and 5,000 shares of 6%, $10 par noncumulative preferred stock. In 2014, Zone declared and paid dividends of $2,000. In 2015, Zone declared and paid dividends of $6,000. How much of the 2015 dividend was distributed to preferred shareholders?
  2. $2,000
  3. $4,000
  4. $3,000
  5. None of these answers are correct

 

 

 

 

  1. Outstanding stock of the Core Corporation included 20,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par noncumulative preferred stock. In 2014, Core declared and paid dividends of $4,000. In 2015, Core declared and paid dividends of $12,000. How much of the 2015 dividend was distributed to preferred shareholders?
  2. $8,000
  3. $4,000
  4. $6,000
  5. None of these answers are correct

 

 

 

  1. On January 1, Collins Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event,
  2. Collins’ Paid-in Capital in Excess of Par account increased $400,000.
  3. Collins’ total stockholders’ equity was unaffected.
  4. Collins’ Stock Dividends account increased $1,200,000.
  5. All of these answers are correct.

 

 

 

  1. On January 1, Edison Corporation had 1,000,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 20% stock dividend. Market value of the stock was $18/share. As a result of this event,
  2. Edison’s Paid-in Capital in Excess of Par account increased $1,600,000.
  3. Edison’s total stockholders’ equity was unaffected.
  4. Edison’s Stock Dividends account increased $3,600,000.

d    All of these answers are correct.

 

 

 

  1. Start Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2015. What is the annual dividend on the preferred stock?
  2. $50 per share
  3. $25,000 in total
  4. $50,000 in total
  5. $0.50 per share

 

 

 

 

  1. Arm, Inc., has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2015. If the board of directors declares a $200,000 dividend, the
  2. preferred stockholders will receive 1/10th of what the common stockholders will receive.
  3. preferred stockholders will receive the entire $200,000.
  4. $50,000 will be held as restricted retained earnings and paid out at some future date.
  5. preferred stockholders will receive $50,000 and the common stockholders will receive $150,000.

 

 

 

  1. Aim, Inc., has 10,000 shares of 4%, $100 par value, noncumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2015. There were no dividends declared in 2014. The board of directors declares and pays a $120,000 dividend in 2015. What is the amount of dividends received by the common stockholders in 2015?
  2. $0
  3. $40,000
  4. $60,000
  5. $80,000

 

 

 

  1. Last Inc., has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2015, and December 31, 2014. The board of directors declared and paid a $4,000 dividend in 2014. In 2015, $24,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2015?
  2. $16,000
  3. $12,000
  4. $8,000
  5. $6,000

 

 

 

  1. Art, Inc., has 5,000 shares of 4%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2015. There were no dividends declared in 2013. The board of directors declares and pays a $45,000 dividend in 2014 and in 2015. What is the amount of dividends received by the common stockholders in 2015?
  2. $30,000
  3. $20,000
  4. $45,000
  5. $0

 

 

 

 

  1. Crawl Inc., has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2014, and December 31, 2015. The board of directors declared and paid a $2,000 dividend in 2014. In 2015, $10,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2015?
  2. $6,000
  3. $5,000
  4. $4,000
  5. $3,000

 

 

 

  1. On January 1, Sway Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a
  2. credit to Stock Dividends for $18,000.
  3. credit to Cash for $78,000.
  4. credit to Common Stock Dividends Distributable for $60,000.
  5. debit to Common Stock Dividends Distributable for $60,000.

 

 

 

  1. On January 1, Sway Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 15% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a
  2. credit to Cash for $90,000.
  3. debit to Common Stock Dividends Distributable for $90,000.
  4. credit to Paid-in Capital in Excess of Par for $27,000.
  5. debit to Stock Dividends for $27,000.

 

 

 

  1. On January 1, Soft Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The entry to record the transaction of June 17 would include a
  2. debit to Stock Dividends for $120,000.
  3. credit to Cash for $120,000.
  4. credit to Common Stock Dividends Distributable for $120,000.
  5. credit to Common Stock Dividends Distributable for $40,000.

 

 

 

 

  1. On January 1, Soft Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The stock was distributed on June 30. The entry to record the transaction of June 30 would include a
  2. credit to Common Stock for $80,000.
  3. debit to Common Stock Dividends Distributable for $120,000.
  4. credit to Paid-in Capital in Excess of Par for $40,000.
  5. debit to Stock Dividends for $40,000.

 

 

 

  1. Cork Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 6%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Cork distribute to the common stockholders?
  2. $88,000.
  3. $72,000.
  4. $124,000.
  5. None of these answers are correct.

 

 

 

  1. Land Inc. has retained earnings of $800,000 and total stockholders’ equity of $2,000,000. It has 300,000 shares of $5 par value common stock outstanding, which is currently selling for $30 per share. If Land declares a 10% stock dividend on its common stock:
  2. net income will decrease by $150,000.
  3. retained earnings will decrease by $150,000 and total stockholders’ equity will increase by $150,000.
  4. retained earnings will decrease by $900,000 and total stockholders’ equity will increase by $900,000.
  5. retained earnings will decrease by $900,000 and total paid-in capital will increase by $900,000.

 

 

 

  1. On December 31, 2015, Stock, Inc. has 4,000 shares of 6% $100 par value cumulative preferred stock and 60,000 shares of $10 par value common stock outstanding. On December 31, 2015, the directors declare a $20,000 cash dividend. The entry to record the declaration of the dividend would include:
  2. a credit of $4,000 to Cash Dividends.
  3. a note in the financial statements that dividends of $4 per share are in arrears on preferred stock for 2015.
  4. a debit of $20,000 to Common Stock.
  5. a credit of $20,000 to Dividends Payable.

 

 

 

  1. Saint, Inc. declares a 15% common stock dividend when it has 30,000 shares of $10 par value common stock outstanding. If the market value of $24 per share is used, the amounts debited to Stock Dividends and credited to Paid-in Capital in Excess of Par are:

Paid-in Capital in

Stock Dividends                              Excess of Par

  1. $45,000 $0
  2. $108,000 $63,000
  3. $108,000 $45,000
  4. $45,000 $63,000

 

 

 

  1. Cloud Manufacturing declared a 10% stock dividend when it had 700,000 shares of $3 par value common stock outstanding. The market price per common share was $12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to
  2. Stock Dividends for $210,000.
  3. Paid-in Capital in Excess of Par for $630,000.
  4. Common Stock for $210,000.
  5. Common Stock Dividends Distributable for $840,000.

 

 

 

  1. The following selected amounts are available for Clark Company.

Retained earnings (beginning)                 $900

Net loss                                                     150

Cash dividends declared                            100

Stock dividends declared                           100

What is its ending retained earnings balance?

  1. $750
  2. $800
  3. $550
  4. $700

 

 

 

  1. Car and Auto Sisters had retained earnings of $18,000 on the balance sheet but disclosed in the footnotes that $3,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends?
  2. $14,000
  3. $15,000
  4. $18,000
  5. $12,000

 

 

 

 

  1. Moore, Inc. had 250,000 shares of common stock outstanding before a stock split occurred, and 1,000,000 shares outstanding after the stock split. The stock split was
  2. 2-for-4.
  3. 5-for-1.
  4. 1-for-4.
  5. 4-for-1.

 

 

 

  1. Restricting retained earnings for the cost of treasury stock purchased is a
  2. contractual restriction.
  3. legal restriction.
  4. stock restriction.
  5. voluntary restriction.

 

 

  1. A prior period adjustment that corrects income of a prior period requires that an entry be made to
  2. an income statement account.
  3. a current year revenue or expense account.
  4. the retained earnings account.
  5. an asset account.

 

 

  1. If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to
  2. decrease total assets and total stockholders’ equity.
  3. increase stockholders’ equity and decrease total liabilities.
  4. decrease total retained earnings and increase total liabilities.
  5. reduce the amount of retained earnings available for dividend declarations.

 

 

  1. A credit balance in retained earnings represents
  2. the amount of cash retained in the business.
  3. a claim on specific assets of the corporation.
  4. a claim on the aggregate assets of the corporation.
  5. the amount of stockholders’ equity exempted from the stockholders’ claim on total assets.

 

 

  1. A net loss
  2. occurs if operating expenses exceed cost of goods sold.
  3. is not closed to Retained Earnings if it would result in a debit balance.
  4. is closed to Retained Earnings even if it would result in a debit balance.
  5. is closed to the paid-in capital account of the stockholders’ equity section of the balance sheet.

 

 

 

  1. Prior period adjustments are reported
  2. in the footnotes of the current year’s financial statements.
  3. on the current year’s balance sheet.
  4. on the current year’s income statement.
  5. on the current year’s retained earnings statement.

 

 

  1. Retained earnings are occasionally restricted
  2. to set aside cash for dividends.
  3. to keep the legal capital associated with paid-in capital intact.
  4. due to contractual loan restrictions.
  5. if preferred dividends are in arrears.

 

 

  1. Retained earnings is increased by each of the following except
  2. net income.
  3. some prior period adjustments.
  4. some disposals of treasury stock.
  5. All of these increase retained earnings.

 

 

  1. A prior period adjustment for understatement of net income will
  2. be credited to the Retained Earnings account.
  3. be debited to the Retained Earnings account.
  4. show as a gain on the current year’s Income Statement.
  5. show as an asset on the current year’s Balance Sheet.

 

 

  1. The retained earnings statement
  2. is the owners’ equity statement for a corporation.
  3. will show an addition to the beginning retained earnings balance for an understatement of net income in a prior year.
  4. will not reflect net losses.
  5. will, in some cases, fail to reconcile the beginning and ending retained earnings balances.

 

 

  1. In the stockholders’ equity section of the balance sheet,
  2. Common Stock Dividends Distributable will be classified as part of additional paid-in capital.
  3. Common Stock Dividends Distributable will appear in its own subsection of the stock- holders’ equity.
  4. Additional Paid-in Capital appears under the subsection Paid-in Capital.
  5. Dividends in arrears will appear as a restriction of Retained Earnings.

 

 

 

  1. The return on common stockholders’ equity is computed by dividing net income available to common stockholders by
  2. ending total stockholders’ equity.
  3. ending common stockholders’ equity.
  4. average total stockholders’ equity.
  5. average common stockholders’ equity.

 

 

  1. The return on common stockholders’ equity is computed by dividing
  2. net income by ending common stockholders’ equity.
  3. net income by average common stockholders’ equity.
  4. net income less preferred dividends by ending common stockholders’ equity.
  5. net income less preferred dividends by average common stockholders’ equity.

 

 

  1. Kong Inc. reported net income of $298,000 during 2015 and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. Common stockholders’ equity was $1,200,000 on January 1, 2015, and $1,600,000 on December 31, 2015. The company’s return on common stockholders’ equity for 2015 is:
  2. 17.4%
  3. 17.0%
  4. 15.1%
  5. 21.3%

 

 

 

  1. King Corporation had net income of $260,000 and paid dividends of $40,000 to common stockholders and $10,000 to preferred stockholders in 2015. King Corporation’s common stockholders’ equity at the beginning and end of 2015 was $870,000 and $1,130,000, respectively. There are 100,000 weighted-average shares of common stock outstanding.

King Corporation’s return on common stockholders’ equity was

  1. 18.6%.
  2. 25%.
  3. 21%.
  4. 22.1%.

 

 

 

  1. Assume that all balance sheet amounts for Marley Company represent average balance figures.

Stockholders’ equity—common                                    $150,000

Total stockholders’ equity                                              200,000

Sales                                                                                 100,000

Net income                                                                         29,000

Number of shares of common stock                                  10,000

Common stock dividends                                                  10,000

Preferred stock dividends                                                    4,000


MC. 212      (Cont.)

What is the return on common stockholders’ equity ratio for Marley?

  1. 19.3%
  2. 16.7%
  3. 12.5%
  4. 10.0%

 

 

 

  1. Vega Corporation’s December 31, 2015 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 15,000 shares

authorized; 10,000 shares issued                                                  $   200,000

Common stock, $10 par value, 1,000,000 shares authorized;

975,000 shares issued, 960,000 shares outstanding                       9,750,000

Paid-in capital in excess of par—preferred stock                                            30,000

Paid-in capital in excess of par—common stock                                      11,500,000

Retained earnings                                                                                        3,750,000

Treasury stock (15,000 shares)                                                                     315,000

 

Vega’s total paid-in capital was

  1. $21,480,000.
  2. $21,795,000.
  3. $21,165,000.
  4. $11,530,000.

 

 

 

  1. Vega Corporation’s December 31, 2015 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares

authorized; 8,500 shares issued                                                    $   170,000

Common stock, $10 par value, 1,000,000 shares authorized;

950,000 shares issued, 940,000 shares outstanding                       9,500,000

Paid-in capital in excess of par—preferred stock                                            34,000

Paid-in capital in excess of par—common stock                                      11,500,000

Retained earnings                                                                                        3,750,000

Treasury stock (15,000 shares)                                                                     315,000

 

Vega’s total stockholders’ equity was

  1. $24,669,000.
  2. $24,690,000.
  3. $25,269,000.
  4. $24,639,000.

 

 

 

 

  1. Bacon Corporation began business by issuing 180,000 shares of $5 par value common stock for $25 per share. During its first year, the corporation sustained a net loss of $30,000. The year-end balance sheet would show
  2. Common stock of $900,000.
  3. Common stock of $4,500,000.
  4. Total paid-in capital of $4,470,000.
  5. Total paid-in capital of $930,000.

 

 

 

  1. Realistic Corporation’s December 31, 2015 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 20,000 shares

authorized; 10,000 shares issued                                                $     200,000

Common stock, $10 par value, 2,000,000 shares authorized;

1,950,000 shares issued, 1,930,000 shares outstanding               19,500,000

Paid-in capital in excess of par—preferred stock                                            60,000

Paid-in capital in excess of par—common stock                                      24,000,000

Retained earnings                                                                                        7,650,000

Treasury stock (20,000 shares)                                                                     630,000

 

Realistic’s total paid-in capital was

  1. $43,760,000.
  2. $44,390,000.
  3. $43,130,000.
  4. $24,060,000.

 

 

 

  1. Rouse Corporation’s December 31, 2015 balance sheet showed the following:

8% preferred stock, $10 par value, cumulative, 20,000 shares

authorized; 15,000 shares issued                                                $     150,000

Common stock, $10 par value, 2,000,000 shares authorized;

1,950,000 shares issued, 1,930,000 shares outstanding               19,500,000

Paid-in capital in excess of par—preferred stock                                            60,000

Paid-in capital in excess of par—common stock                                      24,000,000

Retained earnings                                                                                        7,650,000

Treasury stock (20,000 shares)                                                                     630,000

 

Rouse’s total stockholders’ equity was

  1. $51,990,000.
  2. $43,710,000.
  3. $51,360,000.
  4. $50,730,000.

 

 

 

 

  1. Adams Corporation began business by issuing 400,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end balance sheet would show
  2. Common stock of $2,000,000.
  3. Common stock of $9,600,000.
  4. Total paid-in capital of $9,560,000.
  5. Total paid-in capital of $7,600,000.

 

 

 

  1. The trial balance of Houston Inc. includes the following balances: Common Stock, $40,000; Paid-in Capital in Excess of Par, $64,000; Treasury Stock, $6,000; Preferred Stock, $30,000. Capital stock totals
  2. $70,000.
  3. $104,000.
  4. $134,000.
  5. $140,000.

 

 

 

  1. Each of the following is reported for common stock except the
  2. par value.
  3. shares issued.
  4. shares outstanding.
  5. liquidation value.

 

 

  1. Paid-in capital from treasury stock would appear on a balance sheet under the category
  2. capital stock.
  3. treasury stock.
  4. additional paid-in capital.
  5. contra to stockholders’ equity.

 

 

  1. Two classifications appearing in the paid-in capital section of the balance sheet are
  2. preferred stock and common stock.
  3. paid-in capital and retained earnings.
  4. capital stock and additional paid-in capital.
  5. capital stock and treasury stock.

 

 

  1. Information that is not generally reported for each class of stock on the balance sheet is
  2. the market value.
  3. the par value.
  4. shares authorized.
  5. shares issued.

 

 

 

  1. In published annual reports
  2. subdivisions within the stockholders’ equity section are routinely reported in detail.
  3. capital surplus is used in place of retained earnings.
  4. the individual sources of additional paid-in capital are often combined.
  5. retained earnings is often not shown separately.

 

 

  1. Additional paid-in capital includes all of the following except
  2. paid-in capital from treasury stock.
  3. paid-in capital in excess of par.
  4. paid-in capital in excess of stated value.
  5. paid-in capital in excess of book value.

 

 

  1. A stockholders’ equity statement shows
  2. the names of each stockholder.
  3. how profits are distributed to the various classes of stockholders.
  4. the number of shares owned by each of the stockholders.
  5. the changes in each stockholders’ equity account and in total stockholders’ equity during the period.

 

 

  1. A statement of stockholders’ equity discloses all of the following except:
  2. The cost of treasury stock owned at the end of the year.
  3. Net income for the current year.
  4. The amount of cash dividends declared during the current year.
  5. The market value of the stockholders’ equity at the end of the year.

 

 

  1. Book value per share is computed by dividing total
  2. paid-in capital by the number of common shares outstanding.
  3. paid-in capital by the number of common shares issued.
  4. stockholders’ equity by the number of common shares outstanding.
  5. stockholders’ equity by the number of common shares issued.

 

 

a229.    Barr, Inc. reports $4,000,000 of common stock, and $6,000,000 of additional paid-in capital on its balance sheet. The number of common shares issued and outstanding is 500,000 shares. The book value per share is

  1. $20.
  2. $12.
  3. $8.
  4. not determinable.

 

 

 

  1. Book value per share is
  2. the equity a common stockholder has in the net assets of the corporation from owning one share of stock.
  3. the equity a common stockholder has in the total assets of the corporation from owning one share of stock.
  4. always equal to the market value of the stock.
  5. computed only for preferred stockholders.

 

 

  1. Which of the following is an incorrect statement about a corporation?
  2. A corporation is an entity separate and distinct from its owners.
  3. Creditors ordinarily have recourse only to corporate assets in satisfaction of their claims.
  4. A corporation may be formed in writing, orally, or implied.
  5. A corporation is subject to numerous state and federal regulations.

 

 

  1. Legal capital per share cannot be equal to the
  2. par value per share of par value stock.
  3. total proceeds from the sale of par value stock above par value.
  4. stated value per share of no-par value stock.
  5. total proceeds from the sale of no-par value stock.

 

 

  1. When common stock is issued for services or non-cash assets, cost should be
  2. only the fair value of the consideration given up.
  3. only the fair value of the consideration received.
  4. the book value of the common stock issued.
  5. either the fair value of the consideration given up or the consideration received, whichever is more clearly evident.

 

 

  1. When the selling price of treasury stock is greater than its cost, the company credits the difference to
  2. Gain on Sale of Treasury Stock.
  3. Paid-in Capital from Treasury Stock.
  4. Paid-in Capital in Excess of Par.
  5. Treasury Stock.

 

 

  1. Sandoz Corporation was organized on January 1, 2015, with authorized capital of 500,000 shares of $10 par value common stock. During 2015, Sandoz issued 30,000 shares at $12 per share, purchased 3,000 shares of treasury stock at $13 per share, and sold 3,000 shares of treasury stock at $14 per share. What is the amount of additional paid-in capital at December 31, 2015?
  2. $0
  3. $3,000
  4. $60,000
  5. $63,000

 

 

  1. The purchase of treasury stock
  2. decreases common stock authorized.
  3. decreases common stock issued.
  4. decreases common stock outstanding.
  5. has no effect on common stock outstanding.

 

 

  1. Preferred stockholders have a priority over common stockholders as to
  2. dividends only.
  3. assets in the event of liquidation only.
  4. voting rights.
  5. both dividends and assets in the event of liquidation.

 

 

  1. On January 2, 2012, Porter Corporation issued 30,000 shares of 5% cumulative preferred stock at $100 par value. On December 31, 2015, Porter Corporation declared and paid its first dividend. What dividends are the preferred stockholders entitled to receive in the current year before any distribution is made to common stockholders?
  2. $0
  3. $150,000
  4. $450,000
  5. $600,000

 

 

 

  1. Which of the following statements about a cash dividend is incorrect?
  2. The legality of a cash dividend depends on state corporation laws.
  3. The legality of a dividend does not indicate a company’s ability to pay a dividend.
  4. Dividends are not a liability until declared.
  5. Shareholders usually vote to determine the amount of income to be distributed in the form of a dividend.

 

 

  1. The date a cash dividend becomes a binding legal obligation to a corporation is the
  2. declaration date.
  3. earnings date.
  4. payment date.
  5. record date.

 

 

  1. Dillon Corporation splits its common stock 2 for 1, when the market value is $40 per share. Prior to the split, Dillon had 50,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock
  2. remains the same.
  3. is reduced to $2 per share.
  4. is reduced to $5 per share.
  5. is reduced to $20 per share.

 

 

 

 

  1. Which of the following statements about retained earnings restrictions is incorrect?
  2. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased.
  3. Long-term debt contracts may impose a restriction on retained earnings as a condition for the loan.
  4. The board of directors of a corporation may voluntarily create retained earnings restrictions for specific purposes.
  5. Retained earnings restrictions are generally disclosed through a journal entry on the books of a company.

 

 

  1. Prior period adjustments
  2. may only increase retained earnings.
  3. may only decrease retained earnings.
  4. may either increase or decrease retained earnings.
  5. do not affect retained earnings.

 

 

  1. Farmer Company reports the following amounts for 2015:

Net income                                                             $135,000

Average stockholders’ equity                                   500,000

Preferred dividends                                                     15,000

Par value preferred stock                                          100,000

The 2015 rate of return on common stockholders’ equity is

  1. 30.0%.
  2. 24.0%.
  3. 27.0%.
  4. 33.8%.

 

 

 

  1. The return on common stockholders’ equity is computed by dividing
  2. net income by ending common stockholders’ equity.
  3. net income by average common stockholders’ equity.
  4. net income minus preferred dividends by ending common stockholders’ equity.
  5. net income minus preferred dividends by average common stockholders’ equity.

 

 

  1. Additional paid-in capital includes all of the following except the amounts paid in
  2. over par value.
  3. over stated value.
  4. from treasury stock.
  5. for the par value of common stock.

 

 

 

 

  1. In the stockholders’ equity section of the balance sheet, the classification of capital stock consists of
  2. additional paid-in capital and common stock.
  3. common stock and treasury stock.
  4. common stock, preferred stock, and treasury stock.
  5. common stock and preferred stock.

 

 

a248.    At December 31, the stockholders’ equity of Smith Company was as follow:

Common stock, $5 par value: 1,100,000 shares issued
and 1,000,000 shares outstanding                                                                 $5,500,000

Additional paid-in capital                                                                               1,400,000

Retained earnings                                                                                            1,500,000

Treasury stock, (100,000 shares)                                                                    (700,000)

Total stockholders’ equity                                                                           $7,700,000

The book value per share of common stock is

  1. $7.00
  2. $7.20
  3. $8.40
  4. $7.70

 

 

 

  1. Under IFRS, the term reserves relates to each of the following except
  2. asset revaluations.
  3. contributed (paid-in) capital.
  4. fair value differences.
  5. retained earnings.

 

 

  1. IFRS uses each of the following terms to describe retained earnings except
  2. accumulated profit or loss.
  3. retained earnings.
  4. retained profits.
  5. share earnings.

 

 

  1. A major difference between IFRS and GAAP relates to the
  2. Retained Earnings account.
  3. Revaluation Surplus account.
  4. Share Capital account.
  5. Share Premium account.

 

 

  1. IFRS treats the purchase of treasury stock as any of the following except
  2. an increase to a contra equity account.
  3. a decrease to retained earnings.
  4. a decrease to share capital.
  5. a decrease to share premium.

 

 

  1. Under IFRS, Revaluation Surplus is part of
  2. share premium.
  3. retained earnings.
  4. general reserves.
  5. contributed capital.

 

 

  1. Under IFRS, equity is described as each of the following except
  2. retained equity.
  3. shareholders’ funds.
  4. owners’ equity.
  5. capital and reserves.

 

 

  1. Reserves include each of the following except
  2. other comprehensive income items.
  3. revaluation surplus.
  4. share premium.
  5. unrealized gains on available-for-sale securities.

 

 

  1. Previously issued financial statements with errors are required to be restated under
  2. GAAP only.
  3. IFRS only.
  4. Both GAAP and IFRS.
  5. Neither GAAP or IFRS.

 

 

  1. The accounting is essentially the same under IFRS and GAAP for
  2. prior period adjustments.
  3. revaluation surplus.
  4. treasury stock.
  5. All of these answers are correct.

 

  1. A statement of comprehensive income is presented in
  2. a single-statement format only.
  3. a two-statement format only.
  4. an operating format.
  5. either a one- or two-statement format.

 

 

 

 

 

BRIEF EXERCISES

 

BE 259

Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not applicable to the corporate form of business organization.

 

A = Advantage

D = Disadvantage

N = Not Applicable

 

Characteristics

 

______ 1.  Separate legal entity

 

______ 2.  Taxable entity resulting in additional taxes

 

______ 3.  Continuous life

 

______ 4.  Unlimited liability of owners

 

______ 5.  Government regulation

 

______ 6.  Separation of ownership and management

 

______ 7.  Ability to acquire capital

 

______ 8.  Ease of transfer of ownership

 

 

BE 260

On July 6, Clayton Corporation issued 3,000 shares of its $1.50 par common stock. The market price of the stock on that date was $18 per share. Journalize the issuance of the stock.

 

 

BE 261

Domaine Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2015, the company has the following stock transactions.

Jan.   15    Issued 500,000 shares of stock at $7 per share.

Sept.   5    Purchased 30,000 shares of common stock for the treasury at $9 per share.

 

Instructions

Journalize the transactions for Domaine Corporation.

 

BE 262

An inexperienced accountant for Douglas Corporation made the following entries.

 

July   1      Cash……………………………………………………………………………      180,000

Common Stock…………………………………………………….                           180,000

(Issued 20,000 shares of common stock,

par value $6 per share)

 

Sept.  1      Common Stock…………………………………………………………….        24,000

Retained Earnings…………………………………………………………        16,000

Cash……………………………………………………………………                             40,000

(Purchased 4,000 shares issued on July 1 for the

treasury at $10 per share)

 

Instructions

On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions.

 

 

BE 263

On September 5, Borton Corporation acquired 2,500 shares of its own $1 par common stock for $22 per share. On October 15, 1,000 shares of the treasury stock is sold for $25 per share.

 

Instructions

Journalize the purchase and sale of the treasury stock assuming that the company uses the cost method.

 

BE 264

Wise Company had the following transactions.

  1. Issued 7,000 shares of common stock with a stated value of $10 for $130,000.
  2. Issued 2,000 shares of $100 par preferred stock at $108 for cash.

 

Instructions

Prepare the journal entries to record the above stock transactions.

 

 

BE 265

On February 1, Barton Corporation issued 5,000 shares of its $20 par value preferred stock for $28 per share.

 

Instructions

Journalize the transaction.

 

BE 266

On November 27, the board of directors of Armstrong Company declared a $.50 per share dividend. The dividend is payable to shareholders of record on December 7 on December 24. Armstrong has 25,500 shares of $1 par common stock outstanding at November 27. Journalize the entries needed on the declaration and payment dates.

 

 

BE 267

On October 10, the board of directors of Pattern Corporation declared a 15% stock dividend. On October 10, the company had 10,000 shares of $1 par common stock issued and outstanding with a market price of $16 per share. The stock dividend will be distributed on October 31 to shareholders of record on October 25. Journalize the entries needed for the declaration and distribution of the stock dividend.

 

 

BE 268

Parker Company has 24,000 shares of $1 par common stock issued and outstanding. The company also has 2,000 shares of $100 par 5% cumulative preferred stock outstanding. The company did not pay the preferred dividends in 2014 or 2015. What amount of dividends must the company pay the preferred shareholders in 2016 if they wish to pay the common stockholders a dividend?

 

 

BE 269

On November 1, 2015, Nate Corporation’s stockholders’ equity section is as follows:

Common stock, $10 par value                                    $600,000

Paid-in capital in excess of par                                     180,000

Retained earnings                                                        200,000

Total stockholders’ equity                                         $980,000

 

On November 1, Nate declares and distributes a 15% stock dividend when the market value of the stock is $14 per share.

 

Instructions

Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed.

 

 

BE 270

Match each item/event pair below with the indicated change in the item. An individual classification may be used more than once, or not at all. For each dividend, assume that both declaration and payment or distribution has occurred.

Classifications

  1. Item increases
  2. Item decreases
  3. Item is unchanged
  4. Direction of change cannot be determined

 

                 Item                                                       Event

____   1.    Par value per share                        Stock split

____   2.    Total retained earnings                  Stock dividend

____   3.    Total stockholders’ equity           Prior period adjustment increases last year’s

net income

____   4.    Earnings per common share          Restriction of Retained Earnings

____   5.    Total retained earnings                  Cash dividend

____   6.    Total paid-in capital                     Stock dividend (small)

 

BE 271

Identify which of the following items would be reported as additions (A) or deductions (D) in a Retained Earnings Statement.

  1. Net Income
  2. Net Loss
  3. Cash Dividends
  4. Stock Dividends
  5. Prior period adjustments to correct for overstatement of prior years’ net income
  6. Prior period adjustments to correct for understatement of prior years’ net income

 

BE 272

The balance in retained earnings on January 1, 2015, for Booker Inc., was $575,000. During the year, the corporation paid cash dividends of $70,000 and distributed a stock dividend of $25,000. In addition, the company determined that it had overstated its depreciation expense in prior years by $50,000. Net income for 2015 was $120,000.

 

Instructions

Prepare the retained earnings statement for 2015.

 

 

BE 273

The following information is available for Evans Corporation:

 

      2015                2014   

Average common stockholders’ equity                            $1,500,000      $1,000,000

Average total stockholders’ equity                                     2,000,000        1,500,000

Common dividends declared and paid                                     72,000             50,000

Preferred dividends declared and paid                                     30,000             30,000

Net income                                                                             360,000           300,000

 

Instructions

Compute the return on common stockholders’ equity ratio for both years. Briefly comment on your findings.

 

BE 274

James Corporation has the following accounts at December 31: Common Stock, $10 par 7,000 shares issued, $70,000; Paid-in Capital in Excess of Par $10,000; Retained Earnings $55,000; and Treasury Stock, 500 shares, $10,000. Prepare the stockholders’ equity section of the balance sheet.

 

 

aBE 275

Bellingham Corporation has the following stockholders’ equity balances at December 31, 2015.

 

Common Stock, $1 par                              $ 3,500

Paid in Capital in Excess of par                    28,500

Retained Earnings                                         62,500

Total Stockholders’ Equity                        $94,500

Calculate book value per share.

 

 

EXERCISES

Ex. 276

The following selected transactions pertain to Sinclair Corporation:

Jan.     3    Issued 100,000 shares, $5 par value, common stock for $25 per share.

 

Feb.   10    Issued 6,000 shares, $5 par value, common stock in exchange for special purpose equipment. Sinclair Corporation’s common stock has been actively traded on the stock exchange at $30 per share.

 

Instructions

Journalize the transactions.

 

 

Ex. 277

The corporate charter of Martin Corporation allows the issuance of a maximum of 4,000,000 shares of $1 par value common stock. During its first three years of operation, Martin issued 3,200,000 shares at $15 per share. It later acquired 30,000 of these shares as treasury stock for $25 per share.

 

Instructions

Based on the above information, answer the following questions:

(a)   How many shares were authorized?

(b)   How many shares were issued?

(c)   How many shares are outstanding?

(d)   What is the balance of the Common Stock account?

(e)   What is the balance of the Treasury Stock account?

 

 

Ex. 278

Halpern Corporation is authorized to issue 1,000,000 shares of $3 par value common stock. During 2015, its first year of operation, the company has the following stock transactions.

Jan.     1    Paid the state $5,000 for incorporation fees.

Jan.   15    Issued 500,000 shares of stock at $6 per share.

Jan.   30    Attorneys for the company accepted 500 shares of common stock as payment for legal services rendered in helping the company incorporate. The legal services are estimated to have a value of $7,000.

July     2    Issued 100,000 shares of stock for land. The land had an asking price of $900,000. The stock is currently selling on a national exchange at $8 per share.

Sept.   5    Purchased 15,000 shares of common stock for the treasury at $8 per share.

Dec.    6    Sold 11,000 shares of the treasury stock at $11 per share.

Ex. 278         (Cont.)

 

Instructions

Journalize the transactions for Halpern Corporation.

 

 

Ex. 279

Prepare the necessary journal entry for each of the following transactions for Zenia Corporation.

(a)   Issued 2,000 shares of its $5 par value common stock for $20 per share.

(b)   Issued 5,000 shares of its stock for land advertised for sale at $90,000. Zenia’s stock is actively traded at a market price of $16 per share.

 

 

Ex. 280

Lange Corporation issued 5,000 shares of stock.

 

Instructions

Prepare the entry for the issuance under the following assumptions.

(a)   The stock had a par value of $10 per share and was issued for a total of $65,000.

(b)   The stock had a stated value of $10 per share and was issued for a total of $65,000.


Ex. 280         (Cont.)

 

(c)   The stock had a par value of $10 per share and was issued to attorneys for services during in-corporation valued at $65,000.

(d)   The stock had a par value of $10 per share and was issued for land worth $65,000.

 

 

Ex. 281
  1. Name at least three factors that influence the market value of stock.
  2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why treasury stock may be acquired by a corporation.

 


Ex. 282

The following items were shown on the balance sheet of Easton Corporation on December 31, 2015:

 

Stockholders’ equity

Paid-in capital

Capital stock

Common stock, $10 par value, 400,000 shares

authorized; ______ shares issued and ______ outstanding………………….    $1,850,000

Additional paid-in capital

In excess of par………………………………………………………………………………       165,000

Total paid-in capital………………………………………………………………….      2,015,000

 

Retained earnings………………………………………………………………………………………         750,000

Total paid-in capital and retained earnings…………………………………………      2,765,000

Less: Treasury stock (18,000 shares)………………………………………………………….       (270,000)

Total stockholders’ equity………………………………………………………………    $2,495,000

 

Instructions

Complete the following statements and show your computations.

(a)   The number of shares of common stock issued was _______________.

(b)   The number of shares of common stock outstanding was ____________.

(c)   The sales price of the common stock when issued was $____________.

(d)   The cost per share of the treasury stock was $_______________.

(e)   The average issue price of the common stock was $______________.

(f)   Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the Treasury Stock account would be $_______________.

 

 

Ex. 283

The stockholders’ equity section of Morton Corporation at December 31 is as follows.

 

MORTON CORPORATION

Balance Sheet (partial)

Paid-in capital

Preferred stock, cumulative, 10,000 shares authorized,

5,000 shares issued and outstanding                                                                     $ 300,000

Common Stock, no par, 750,000 shares authorized, 150,000 shares issued             1,500,000

Total paid-in capital                                                                                              1,800,000

Retained earnings                                                                                                                2,050,000

Total paid-in capital and retained earnings                                                                  3,850,000

Less: Treasury stock (5,000 common shares)                                                                         (64,000)

Total stockholders’ equity                                                                                        $3,786,000

 

Instructions

From a review of the stockholders’ equity section, answer the following questions.

(a)   How many shares of common stock are outstanding?

(b)   Assuming there is a stated value, what is the stated value of the common stock?

(c)   What is the par value of the preferred stock?

(d)   If the annual dividend on preferred stock is $15,000, what is the dividend rate on preferred    stock?

(e)   If dividends of $30,000 were in arrears on preferred stock, what would be the balance in        Retained Earnings?

 


Ex. 284

On January 1, 2015, the stockholders’ equity section of Nance Corporation shows: Common stock ($5 par value) $1,500,000; paid-in capital in excess of par value $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred.

Mar.    1   Purchased 30,000 shares for cash at $22 per share.

July     1   Sold 6,000 treasury shares for cash at $27 per share.

Sept.    1   Sold 5,000 treasury shares for cash at $19 per share.

 

Instructions

(a)   Journalize the treasury stock transactions.

(b)   Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.

 

 

Ex. 285

On May 1, Howard Corporation purchased 2,000 shares of its $10 par value common stock at a cash price of $15/share. On July 15, 900 shares of the treasury stock were sold for cash at $17/share.

 

Instructions

Journalize the two transactions.

 

Ex. 286

Yates Corporation has the following stockholders’ equity accounts on January 1, 2015:

Common Stock, $10 par value ……………………………………….    $1,500,000

Paid-in Capital in Excess of Par………………………………………         200,000

Retained Earnings…………………………………………………………         500,000

Total Stockholders’ Equity………………………………………    $2,200,000

The company uses the cost method to account for treasury stock transactions. During 2015, the following treasury stock transactions occurred:

April         1    Purchased 10,000 shares at $19 per share.

August      1    Sold 4,000 shares at $22 per share.

October     1    Sold 2,000 shares at $15 per share.

 

Instructions

(a)    Journalize the treasury stock transactions for 2015.

(b)    Prepare the Stockholders’ Equity section of the balance sheet for Yates Corporation at December 31, 2015. Assume net income was $110,000 for 2015.

 

Ex. 287

Arens Corporation purchased 4,000 shares of its $5 par value common stock for a cash price of $10 per share. Two months later, Arens sold the treasury stock for a cash price of $8 per share.

 

Instructions

Prepare the journal entry to record the sale of the treasury stock assuming

(a)   No balance in Paid-in Capital from Treasury Stock.

(b)   A $3,000 balance in Paid-in Capital from Treasury Stock.

 

 

Ex. 288

An inexperienced accountant for Olsen Corporation made the following entries.

 

July   1      Cash……………………………………………………………………………      240,000

Common Stock…………………………………………………….                           240,000

(Issued 16,000 shares of no-par common stock, stated value $10 per share)

 

Sept.  1      Common Stock…………………………………………………………….        30,000

Retained Earnings…………………………………………………………          6,000

Cash……………………………………………………………………                             36,000

(Purchased 2,000 shares issued on July 1 for the treasury at $18 per share)

 

Dec.   1      Cash……………………………………………………………………………        20,000

Common Stock…………………………………………………….                             15,000

Gain on Sale of Stock…………………………………………….                               5,000

(Sold 1,000 shares of the treasury stock at $20 per share)

 

Instructions

(a)   On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.)

(b)   Prepare the correcting entries that should be made to correct the accounts of Olsen Corporation. (Do not reverse the original entry.)

 

Ex. 289

On January 1, 2015, Dreamy Company issued 30,000 shares of $2 par value common stock for $150,000. On March 1, 2015, the company purchased 6,000 shares of its common stock for $7 per share for the treasury. On June 1, 2015, 1,500 of the treasury shares are sold for $10 per share. On September 1, 2015, 3,000 treasury shares are sold at $5 per share.

 

Instructions

Journalize the stock transactions of Dreamy Company in 2015.

 

 

Ex. 290

Wave Company originally issued 30,000 shares of $5 par common stock for $210,000 on January 3, 2015. Wave purchased 1,500 shares of treasury stock for $12,000 on November 2, 2015. On December 6, 2015, 600 shares of the treasury stock are sold for $7,200.


Ex. 290         (Cont.)

 

Instructions

Prepare journal entries to record these stock transactions.

 

Ex. 291

The stockholders’ equity section of Barrel Corporation’s balance sheet at December 31, 2014, appears below:

Stockholders’ equity

Paid-in capital

Common stock, $10 par value, 400,000 shares authorized;

250,000 issued and outstanding                                                                $2,500,000

Paid-in capital in excess of par                                                                          1,200,000

Total paid-in capital                                                                                3,700,000

Retained earnings                                                                                                    600,000

Total stockholders’ equity                                                                    $4,300,000

 

During 2015, the following stock transactions occurred:

Jan.     18     Issued 50,000 shares of common stock at $32 per share.

Aug.   20     Purchased 25,000 shares of Barrel Corporation’s common stock at $24 per share to be held in the treasury.

Nov.     5     Reissued 9,000 shares of treasury stock for $28 per share.

 

Instructions

(a)   Prepare the journal entries to record the above stock transactions.

(b)   Prepare the stockholders’ equity section of the balance sheet for Barrel Corporation at December 31, 2015. Assume that net income for the year was $150,000 and that no dividends were declared.

 

Ex. 292

Sloman Corporation has 100,000 shares of $50 par value preferred stock authorized. During the year, it had the following transactions related to its preferred stock.

(a)   Issued 20,000 shares at $55 per share.

(b)   Issued 10,000 shares for equipment having a $700,000 asking price. The stock had a market value of $75 per share

 

Instructions

Journalize the transactions.

 

Ex. 293

Desert Corporation has the following capital stock outstanding at December 31, 2015:

7% Preferred stock, $100 par value, cumulative

15,000 shares issued and outstanding ………………………………………………..          $1,500,000

 

Common stock, no par, $10 stated value, 500,000 shares authorized,

350,000 shares issued and outstanding ………………………………………………            3,500,000

 

The preferred stock was issued at $130 per share. The common stock was issued at an average per share price of $14.

 

Instructions

Prepare the paid-in capital section of the balance sheet at December 31, 2015.

 

 

Ex. 294

In its first year of operations, Arid Corporation had the following transactions pertaining to its $20 par value preferred stock.

Feb.   1      Issued 6,000 shares for cash at $43 per share.

Nov.  1      Issued 3,000 shares for cash at $45 per share.

 

Instructions

(a)   Journalize the transactions.

(b)   Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par — preferred stock at the end of the year.

 

 

Ex. 295

Trane Corporation has the following stockholders’ equity accounts:

Preferred Stock

Paid-in Capital in Excess of Par—Preferred Stock

Common Stock

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital from Treasury Stock—Common

Retained Earnings

Treasury Stock—Common

 

Instructions

Classify each account using the following tabular alignment.

            Paid-in Capital             Retained

     Account                                               Capital Stock     Additional     Earnings          Other

 

Ex. 296

Darling Corporation issued 200,000 shares of $20 par value, cumulative, 5% preferred stock on January 1, 2013, for $4,500,000. In December 2015, Darling declared its first dividend of $800,000.

 

Instructions

(a)     Prepare Darling’s journal entry to record the issuance of the preferred stock.

(b)    If the preferred stock is not cumulative, how much of the $800,000 would be paid to common stockholders?

(c)     If the preferred stock is cumulative, how much of the $800,000 would be paid to common   stockholders?

 

 

Ex. 297

The stockholders’ equity section of Maria Corporation at December 31, 2014, included the following:

6% preferred stock, $100 par value, cumulative,

10,000 shares authorized, 8,000 shares issued and outstanding………..       $   800,000

Common stock, $10 par value, 250,000 shares authorized,

200,000 shares issued and outstanding …………………………………………       $2,000,000

Dividends were not declared on the preferred stock in 2014 and are in arrears.

On September 15, 2015, the board of directors of Maria Corporation declared dividends on the preferred stock for 2014 and 2015, to stockholders of record on October 1, 2015, payable on October 15, 2015.

 

On November 1, 2015, the board of directors declared a $.50 per share dividend on the common stock, payable November 30, 2015, to stockholders of record on November 15, 2015.

 

 

Ex. 297         (Cont.)

 

Instructions

Prepare the journal entries that should be made by Maria Corporation on the dates indicated below:

September 15, 2015                November 1, 2015

October 1, 2015                      November 15, 2015

October 15, 2015                    November 30, 2015

 

 

Ex. 298

Stockton Corporation has 160,000 shares of $5 par value common stock outstanding. It declared a 15% stock dividend on June 1 when the market price per share was $13. The shares were issued on June 30.

 

Instructions

Prepare the necessary entries for the declaration and payment of the stock dividend.

 

 

Ex. 299

Jungle Corporation’s stockholders’ equity section at December 31, 2014 appears below:

Stockholders’ equity

Paid-in capital

Common stock, $10 par, 60,000 outstanding          $600,000

Paid-in capital in excess of par                                150,000

Total paid-in capital                                                                        $750,000

Retained earnings                                                                                               150,000

Total stockholders’ equity                                                                                         $900,000

 

On June 30, 2015, the board of directors of Kenner Corporation declared a 15% stock dividend, payable on July 31, 2015, to stockholders of record on July 15, 2015. The fair value of Kenner Corporation’s stock on June 30, 2015, was $15.

On December 1, 2015, the board of directors declared a 2 for 1 stock split effective December 15, 2015. Jungle Corporation’s stock was selling for $20 on December 1, 2015, before the stock split was declared. Par value of the stock was adjusted. Net income for 2015 was $190,000 and there were no cash dividends declared.

 

Instructions

(a)   Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split.

(b)   Fill in the amount that would appear in the stockholders’ equity section for Jungle Corporation at December 31, 2015, for the following items:

  1. Common stock                                                   $____________
  2. Number of shares outstanding                           _____________
  3. Par value per share                                             $____________
  4. Paid-in capital in excess of par                          $____________
  5. Retained earnings                                               $____________
  6. Total stockholders’ equity                                $____________

 

 

Ex. 300

Sleep Corporation was organized on January 1, 2014. During its first year, the corporation issued 40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock. At December 31, the company declared the following cash dividends:

 

2014                            $ 6,000

2015                            $30,000

2016                            $60,000

 

Instructions

(a)   Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 4% and not cumulative.

(b)   Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and cumulative.

(c)   Journalize the declaration of the cash dividend at December 31, 2016 using the assumption of part (b).

 

 

Ex. 301

On November 1, 2015, Tech Corporation’s stockholders’ equity section is as follows:

Common stock, $10 par value                                 $   600,000

Paid-in capital in excess of par                                     205,000

Retained earnings                                                         240,000

Total stockholders’ equity                                      $1,045,000

On November 1, Tech declares and distributes a 15% stock dividend when the market value of the stock is $16 per share.

Ex. 301         (Cont.)

Instructions

Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed.

 

 

Ex. 302

During 2015, Pink Corporation had the following transactions and events:

  1. Issued par value preferred stock for cash at par value.
  2. Issued par value common stock for cash at an amount greater than par value.
  3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock.
  4. Declared a small stock dividend when the market value was higher than the par value.
  5. Declared a cash dividend.
  6. Made a prior period adjustment for understatement of net income.
  7. Issued par value common stock for cash at par value.
  8. Paid the cash dividend.
  9. Issued the shares of common stock required by the stock dividend declaration in 4. above.

 

Instructions

Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.

              Paid-in Capital         

Capital                 Additional           Retained

Item                    Stock              Paid-in Capital         Earnings

 

Ex. 303

The following information is available for Pencil Corporation:

Common Stock ($5 par)                             $1,600,000

Retained Earnings                                         1,300,000

A 20% stock dividend is declared and paid when the market value was $16 per share.

 

Instructions

Compute each of the following after the stock dividend.

(a)   Total stockholders’ equity.

(b)   Number of shares outstanding.

 

Ex. 304

On January 1, 2015, Ralph Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and retained earnings of $1,000,000. The company issued 200,000 shares of common stock at $12 per share on July 1. On December 15, the board of directors declared a 15% stock dividend to stockholders of record on December 31, 2015, payable on January 15, 2016. The market value of Ralph Corporation stock was $14 per share on December 15 and $16 per share on December 31. Net income for 2015 was $500,000.

 

Instructions

(1)   Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December 15.

(2)   Prepare the stockholders’ equity section of the balance sheet for Ralph Corporation at December 31, 2015.

 

 


Ex. 305

On January 1, 2015, Magnus Corporation had 60,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred:

Mar.     1      Issued 35,000 shares of common stock for $550,000.

June      1      Declared a cash dividend of $2.00 per share to stockholders of record on June 15.

June    30      Paid the $2.00 cash dividend.

Dec.      1      Purchased 5,000 shares of common stock for the treasury for $22 per share.

Dec.    15      Declared a cash dividend on outstanding shares of $2.20 per share to stockholders of record on December 31.

 

Instructions

Prepare journal entries to record the above transactions.

 

Ex. 306

Record the following transactions for Quik Corporation on the dates indicated.

  1. On March 31, 2015, Quik Corporation discovered that Depreciation Expense on equipment for the year ended December 31, 2014, had been recorded twice, for a total amount of $84,000 instead of the correct amount of $42,000.
  2. On June 30, 2015, the company’s internal auditors discovered that the April 2015 telephone bill for $2,400 had erroneously been charged to the Interest Expense account.
  3. On August 14, 2015, cash dividends on preferred stock of $150,000 declared on July 1, 2015, were paid.

 

 

 

Ex. 307

The following information is available for Zip Corporation:

Retained Earnings, December 31, 2014                                              $1,500,000

Net Income for the year ended December 31, 2015                           $   200,000

 

The company accountant, in preparing financial statements for the year ending December 31, 2015, has discovered the following information:

The company’s previous bookkeeper, who has been fired, had recorded depreciation expense on equipment in 2013 and 2014 using the double-declining-balance method of depreciation. The bookkeeper neglected to use the straight-line method of depreciation which is the company’s policy. The cumulative effects of the error on prior years was $35,000, ignoring income taxes. Depreciation was computed by the straight-line method in 2015.

 

Instructions

(a)   Prepare the entry for the prior period adjustment.

(b)   Prepare the retained earnings statement for 2015.

 

Ex. 308

The following information is available for Matlin Inc.:

Beginning retained earnings                                               $600,000

Cash dividends declared                                                        60,000

Net income for 2015                                                           120,000

Stock dividend declared                                                        35,000

Understatement of last year’s depreciation expense            30,000

 

Instructions

Based on the preceding information, prepare a retained earnings statement for 2015.

 

 

Ex. 309

Rex Company reported retained earnings at December 31, 2014, of $410,000. Reese had 180,000 shares of common stock outstanding throughout 2015.

The following transactions occurred during 2015.

  1. An error was discovered in 2013, depreciation expense was recorded at $60,000, but the correct amount was $50,000.
  2. A cash dividend of $0.50 per share was declared and paid.
  3. A 5% stock dividend was declared and distributed when the market price per share was $15 per share.
  4. Net income was $295,000.

 

Instructions

Prepare a retained earnings statement for 2015.

 

 

Ex. 310

Morgan Company reported the following balances at December 31, 2014: common stock $500,000; paid-in capital in excess of par value $100,000; retained earnings $350,000. During 2015, the following transactions affected stockholders’ equity.

 

  1. Issued preferred stock with a par value of $150,000 for $200,000.
  2. Purchased treasury stock (common) for $50,000.
  3. Earned net income of $140,000.
  4. Declared and paid cash dividends of $75,000.

Instructions

Prepare the stockholders’ equity section of Morgan Company’s December 31, 2015, balance sheet.

 

Ex. 311

On January 1, 2015, Catlin Corporation had Retained Earnings of $400,000. During the year, Catlin had the following selected transactions:

  1. Declared stock dividends of $50,000.
  2. Declared cash dividends of $80,000.
  3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock.
  4. Suffered a net loss of $60,000.
  5. Corrected understatement of 2014 net income because of an inventory error of $48,000.

 

Instructions

Prepare a retained earnings statement for the year.

 

Ex. 312

The following accounts appear in the ledger of Fall Inc. after the books are closed at December 31, 2015.

 

Common Stock, $1 par value, 500,000 shares authorized, 400,000 shares

issued                                                                                                                        $400,000

Common Stock Dividends Distributable                                                                        60,000

Paid-in Capital in Excess of Par—Common Stock                                                       550,000

Preferred Stock, $100 par value, 6%, 10,000 shares authorized; 2,000 shares

issued                                                                                                                          200,000

Retained Earnings                                                                                                         920,000

Treasury Stock (10,000 common shares)                                                                       75,000

Paid-in Capital in Excess of Par—Preferred Stock                                                       310,000

 

Instructions

Prepare the stockholders’ equity section at December 31, 2015, assuming that retained earnings is restricted for plant expansion in the amount of $200,000.

 

 

Ex. 313

The following information is available for Gaynor Corporation:

 

Beginning common stockholders’ equity                    $700,000

Dividends paid to common stockholders                       50,000

Dividends paid to preferred stockholders                      30,000

Ending common stockholders’ equity                       1,000,000

Net income                                                                    217,000

 

Instructions

Based on the preceding information, calculate return on common stockholders’ equity.

 

Ex. 314

The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Star Corporation at December 31, 2015.

Common Stock ($5 stated value)                                                                       $2,200,000

Paid-in Capital in Excess of Par—Preferred Stock                                                 280,000

Paid-in Capital in Excess of Stated Value—Common Stock                                   800,000

Preferred Stock (8%, $100 par, noncumulative)                                                     500,000

Retained Earnings                                                                                                 1,434,000

Treasury Stock—Common (10,000 shares)                                                           130,000

 

Instructions

Prepare the stockholders’ equity section of the balance sheet at December 31, 2015.

 

 

 

Ex. 315

The following information is available for Macon Corporation:

 

Common Stock ($10 par)                                                             $1,700,000

Paid-in Capital in Excess of Par—Preferred                                      200,000

Paid-in Capital in Excess of Stated Value—Common                       750,000

Preferred Stock                                                                                  450,000

Retained Earnings                                                                              800,000

Treasury Stock—Common                                                                  50,000

 

Instructions

Based on the preceding information, calculate each of the following:

(a)   Total paid-in capital.

(b)   Total stockholders’ equity.

 

 

Ex. 316

Place each of the items listed below in the appropriate subdivision of the stockholders’ equity section of a balance sheet.

Common stock, $10 stated value

Retained earnings

8% Preferred stock, $100 par value

Paid-in capital in excess of par

Paid-in capital in excess of stated value

Treasury stock—Common

Paid-in capital from treasury stock

 

Stockholders’ equity

Paid-in capital

Capital stock

 

Additional paid-in capital

 

Total additional paid-in capital

 

Total paid-in capital

Retained earnings

 

Total paid-in capital and retained earnings

 

Total stockholders’ equity

 

 

aEx. 317

The following information is available for Gordon Corporation:

Common stock ($5 par)                                                             $600,000

Paid-in capital in excess of par–common                                     200,000

Retained earnings                                                                         180,000

Treasury stock                                                                               80,000

Common shares issued                                                     100,000 shares

Common shares outstanding                                                          90,000

 

Instructions

Based on the preceding information, calculate the book value per share.

 

 

aEx. 318

On December 31, 2015, Colaw Company reports the following amounts in its stockholder’ equity section:

Common stock ($10 par)                                                           $2,400,000

Paid-in capital in excess of stated value–common                          900,000

Retained earnings                                                                         1,980,000

Treasury stock–common                                                                180,000

 

The common stock has a stated value of $10 per share. One million shares of common stock are authorized and 40,000 shares are held in the treasury.

 

Instructions

Compute the book value per share of common stock

 

 

 

COMPLETION STATEMENTS

  1. A corporation has a separate __________________________ apart from its owners.

 

 

  1. The major advantages of the corporate form of organization include (1) limited _________________ of owners, (2) continuous ____________________ and (3) ease of transferring ___________________.

 

 

  1. Stockholders elect the _______________, who in turn hire the ______________ of the company who have day to day responsibility for running the corporation.

 

 

  1. If a corporation’s stock is traded on the major stock exchanges, the corporation must generally report periodically to a federal agency known as the ____________________.

 

 

  1. Stockholders generally have the right to share in corporate _______________ and in ______________ upon liquidation.

 

  1. Par value of stock represents the __________________ per share that must be retained in the business for the protection of corporate ___________________.

 

 

 

  1. If stock is issued in exchange for noncash assets, the assets should be valued at the ____________________ of the consideration ___________________ or the assets ____________________, whichever is more clearly evident.

 

 

  1. A corporation’s own stock that has been reacquired by the corporation but not canceled is called ___________________ and is deducted from total _______________________ on the balance sheet.

 

 

  1. The _______________ feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends.

 

 

 

  1. Preferred stock has contractual provisions that give it a preference over common stock as to ___________________ and to ___________________ in the event of liquidation.

 

 

  1. Three important dates associated with dividends are the: (1)__________________, (2)__________________, and (3)__________________.

 

 

  1. The entry to record the declaration of a stock dividend increases _______________, and decreases ________________.

  1. Both a stock split and a stock dividend will _________________ the number of shares outstanding and have _________________ on total stockholders’ equity.

 

  1. Corporations sometimes segregate retained earnings into two categories: (1)__________ retained earnings and (2)________________ retained earnings.

 

 

  1. The correction of an error in previously issued financial statements is known as a _________________.

 

  1. The return on ________________ shows how many dollars of net income were earned for each dollar invested by owners.

 

  1. The return on common stockholders’ equity is computed by dividing _____________ minus _______________ dividends by average common stockholders’ equity.

 

  1. The paid-in capital section of the balance sheet consists of two classifications: ______________________ and ______________________.

 

MATCHING

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Limited liability                                          J.     Cumulative feature
  2. Capital stock                                              K.    Deficit
  3. Board of directors                                      L.    Liquidating dividend
  4. Paid-in capital                                            M.   Earnings per share
  5. Retained earnings                                       N.    Return on common stockholders’ equity
  6. Preemptive right                                         O.    Cash dividend
  7. Par value                                                     P.    Declaration date
  8. Legal capital                                               Q.    Stock dividend
  9. Treasury stock                                           R.    Stock split

 

____    1.   Net income retained in the corporation.

 

____    2.   The amount that must be retained in the business for the protection of creditors.

 

____    3.   Preferred stockholders have a right to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

 

____    4.   Creditors only have corporate assets to satisfy their claims.

 

____    5.   Responsible to stockholders for corporate activity.

 

____    6.   The amount assigned to each share of stock in the corporate charter.

 

____    7.   Unit of ownership in a corporation.

 

____    8.   Enables stockholders to maintain their same percentage ownership when new shares are issued.

 

____    9.   Corporation’s own stock that has been reacquired by the corporation but not retired.

 

____  10.   Total amount paid-in on capital stock.

 

____  11.   A dividend declared out of paid-in capital.

 

____  12.   A pro rata distribution of cash to stockholders.

 

____  13.   A debit balance in retained earnings.

 

____  14.   A pro rata distribution of the corporation’s own stock to stockholders.

 

____  15.   Shows how many dollars of net income were earned for each dollar invested by the owners.

 

____  16.   The date the board of directors formally declares the dividend and announces it to stockholders.

 

____  17.   The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share.

 

____  18.   Widely used by stockholders and potential investors in evaluating the profitability of a company.

 

SHORT-ANSWER ESSAY QUESTIONS

S-A E 338

Identify at least six characteristics of the corporate form of business organization. Contrast each one with the partnership form of organization.

 

 

S-A E 339

Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock?

 

 

S-A E 340

Define par value, and discuss its significance in accounting.

 

 

 

S-A E 341

Lang, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $15,000. The treasury stock is resold by Lang, Inc. for $20,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?

 

 

S-A E 342

Why must a corporation have sufficient retained earnings before it may declare cash dividends?

 

 

S-A E 343

Three dates are important in connection with cash dividends. Identify these dates, and explain their significance to the corporation and its stockholders.

 

 

S-A E 344

A prior period adjustment is occasionally reported in company financial statements. What is a prior period adjustment, and how is it reported in the financial statements?

 

 

S-A E 345

The ultimate effect of incurring an expense is to reduce stockholders’ equity. The declaration of a cash dividend also reduces stockholders’ equity. Explain the difference between an expense and a cash dividend and explain why they have the same effect on stockholders’ equity.

 

 

S-A E 346

A large stock dividend and stock split can frequently have the same effect on the market price of a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a corporation’s stock.

 

 

S-A E 347      (Ethics)

Mike Stephenson, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Stephenson had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date.

 

The other members of management called a meeting to determine what they should do. Roger Carlson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years.

 

Required:

  1. Is Mr. Carlson’s suggestion ethical? Explain.
  2. Is it ethical to discontinue the cash dividend? Explain.

 

 

S-A E 348      (Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high-school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet.

 

Required:

Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear.

 

CHALLENGE EXERCISES

CE 1

On January 1, 2015, the stockholders’ equity section of Kingman Corporation shows: common stock ($5 par value) $2,000,000; paid-in capital in excess of par value $1,200,000; and retained earnings $1,500,000. During the year, the following treasury stock transactions occurred.

Mar. 1    Purchased 60,000 shares for cash at $13 per share.

July 1     Sold 15,000 treasury shares for cash at $15 per share.

Sept. 1    Sold 10,000 treasury shares for cash at $11 per share.

 

Instructions

(a) Journalize the treasury stock transactions.

(b) Prepare the stockholders’ equity section after the entries in (a) are recorded.

(c) Prepare the entry for September 1, assuming the treasury shares were sold at $8 per share.

CE 2

 

On January 1, Staley Corporation had 90,000 shares of no-par common stock issued. 5,000 shares are held as treasury stock. The stock has a stated value of $5 per share. During the year, the following transactions occurred.

Apr.  1     Issued 12,000 additional shares of common stock for $18 per share.

June  15   Declared a cash dividend of $1 per share to stockholders of record on June 30.

July   10   Paid the $1 cash dividend.

Dec.  1     Purchased 7,000 additional shares of common stock for $17 per share.

15   Declared a cash dividend on outstanding shares of $1.20 per share to stockholder                             of record on December 31.

 

Instructions

(a)     Prepare the entries, if any, on each of the three dividend dates.

(b)    How are dividends and dividends payable reported in the financial statements prepared at December 31?

 

 

CE 3

 

Kennedy Company reported the following balances at December 31, 2014: common stock $500,000; paid-in capital in excess of par value $200,000; retained earnings $450,000. During 2015, the following transactions affected stockholders’ equity.

 

  1. Issued preferred stock with a par value of $250,000 for $290,000.
  2. Purchased treasury stock (common) for $80,000.
  3. Earned net income of $220,000.
  4. Declared and paid cash dividends of $86,000 ($16,000 preferred).

 

Instructions

(a)     Prepare the stockholders’ equity section of Kennedy Company’s December 31, 2015, balance sheet.

(b)    Compute Kennedy’s 2015 return on common stockholders’ equity.

 


 

 

 

 

Chapter 12

 

INVESTMENTS

CHAPTER LEARNING OBJECTIVES

  1. Discuss why corporations invest in debt and stock securities.
  2. Explain the accounting for debt investments.
  3. Explain the accounting for stock investments.
  4. Describe the use of consolidated financial statements.
  5. Indicate how debt and stock investments are reported in financial statements.
  6. Distinguish between short-term and long-term investments.
  7. Describe the form and content of consolidated financial statements as well as how to prepare them.

 

TRUE-FALSE STATEMENTS

  1. Corporations purchase investments in debt or stock securities generally for one of two reasons.

 

 

  1. A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

 

 

  1. The accounting for short-term debt investments and for long-term debt investments is similar.

 

 

  1. When debt investments are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.

 

 

  1. Debt investments are investments in government and corporation bonds.

 

 

  1. In accordance with the historical cost principle, brokerage fees should be added to the cost of an investment.

 

 

  1. In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

 

 

  1. In accounting for stock investments of less than 20%, the equity method is used.

 

 

  1. Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

 

 

  1. If an investor owns between 20% and 50% of an investee’s common stock, it is presumed that the investor has significant influence on the investee.

 

 

  1. The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

 

 

  1. Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

 

 

  1. Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.

 

 

  1. Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee’s common stock.

 

 

  1. Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

 

 

  1. Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

 

 

  1. The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

 

 

  1. An unrealized gain or loss on trading securities is reported as a separate component of stockholders’ equity.

 

 

 

  1. For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

 

 

  1. A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

 

 

  1. If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

 

 

  1. The Fair Value Adjustment account can only have a credit balance or a zero balance.

 

 

  1. To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

 

 

  1. An investment is readily marketable if it is management’s intent to sell the investment.

 

 

  1. Stocks traded on the New York Stock Exchange are considered readily marketable.

 

 

  1. When a parent company acquires a wholly owned subsidiary for an amount in excess of the book value of the net assets acquired, the excess is always allocated to goodwill.

 

 

  1. A consolidated income statement will reflect only revenue and expense transactions between the consolidated entity and parties outside the affiliated group.

 

 

  1. The process of excluding intercompany transactions in preparing consolidated statements is referred to as intercompany eliminations.

 

 

  1. One of the reasons a corporation may purchase investments is that it has excess cash.

 

 

  1. When recording bond interest, Interest Receivable is reported as a fixed asset in the balance sheet.

 

 

 

  1. Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.

 

 

  1. Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

 

 

  1. Available-for-sale securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

 

 

  1. “Intent to convert” does not include an investment used as a resource that will be used whenever the need for cash arises.

 

 

MULTIPLE CHOICE QUESTIONS

  1. Corporations invest excess cash for short periods of time in each of the following except
  2. equity securities.
  3. highly liquid securities.
  4. low-risk securities.
  5. government securities.

 

 

  1. Corporations invest in other companies for all of the following reasons except to
  2. house excess cash until needed.
  3. generate earnings.
  4. meet strategic goals.
  5. increase trading of the other companies’ stock.

 

 

  1. A typical investment to house excess cash until needed is
  2. stocks of companies in a related industry.
  3. debt securities.
  4. low-risk, highly liquid securities.
  5. stock securities.

 

 

  1. A company may purchase a noncontrolling interest in another firm in a related industry
  2. to house excess cash until needed.
  3. to generate earnings.
  4. for strategic reasons.
  5. for speculative reasons.

 

 

  1. Pension funds and mutual funds regularly invest in debt and stock securities to
  2. generate earnings.
  3. house excess cash until needed.
  4. meet strategic goals.
  5. control the company in which they invest.

 

 

  1. At the time of acquisition of a debt investment,
  2. no journal entry is required.
  3. the historical cost principle applies.
  4. the Stock Investments account is debited when bonds are purchased.
  5. the Investment account is credited for its cost plus brokerage fees.

 

 

  1. Which of the following is not a true statement regarding short-term debt investments?
  2. The securities usually pay interest.
  3. Investments are frequently government or corporate bonds.
  4. This type of investment must be currently traded in the securities market.
  5. Debt investments are recorded at the price paid less brokerage fees.

 

 

  1. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1. Brenner Company has a calendar year end.

The entry for the receipt of interest on July 1, 2014, is

  1. Cash…………………………………………………………………………… 30

Interest Revenue…………………………………………………..                                    30

  1. Cash…………………………………………………………………………… 60

Interest Revenue…………………………………………………..                                    60

  1. Interest Receivable……………………………………………………….. 30

Interest Revenue…………………………………………………..                                    30

  1. Interest Receivable……………………………………………………….. 60

Interest Revenue…………………………………………………..                                    60

 

 

 

 

  1. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 8% bond that pays interest on January 1 and July 1. Brenner Company has a calendar year end.

The adjusting entry on December 31, 2014, is

  1. not required.
  2. Cash…………………………………………………………………………… 40

Interest Revenue…………………………………………………..                                    40

  1. Interest Receivable……………………………………………………….. 40

Interest Revenue…………………………………………………..                                    40

  1. Interest Receivable……………………………………………………….. 40

Debt Investments…………………………………………………                                    40

 

 

 

  1. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 10% bond that pays interest on January 1 and July 1. Brenner Company has a calendar year end.

The entry for the receipt of interest on January 1, 2015 is

  1. Cash…………………………………………………………………………… 110

Interest Revenue…………………………………………………..                                  110

  1. Cash…………………………………………………………………………… 100

Interest Receivable………………………………………………..                                  100

  1. Cash…………………………………………………………………………… 40

Interest Revenue…………………………………………………..                                    40

  1. Cash…………………………………………………………………………… 50

Interest Receivable………………………………………………..                                    50

 

 

  1. On January 1, Skills Company purchased as a short-term investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,200 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?
  2. Cash…………………………………………………………………………… 1,200

Debt Investments ………………………………………………..                               1,200

  1. Cash…………………………………………………………………………… 1,215

Debt Investments…………………………………………………                               1,000

Gain on Sale of Debt Investments…………………………..                                  200

Interest Revenue…………………………………………………..                                    15

  1. Cash…………………………………………………………………………… 1,215

Debt Investments…………………………………………………                               1,200

Interest Revenue…………………………………………………..                                    15

  1. Cash…………………………………………………………………………… 1,200

Debt Investments…………………………………………………                               1,000

Gain on Sale of Debt Investments…………………………..                                  200

 

 

 

 

  1. Which of the following is not a true statement about the accounting for debt investments?
  2. At acquisition, the historical cost principle applies.
  3. The cost includes any brokerage fees.
  4. Debt investments include investments in government and corporation bonds.
  5. The cost includes any accrued interest.

 

 

  1. The cost of debt investments includes each of the following except
  2. brokerage fees.
  3. commissions.
  4. accrued interest.
  5. the price paid.

 

 

  1. If a short-term debt investment is sold, the Investment account is
  2. credited for the book value of the bonds at the sale date.
  3. credited for the cost of the bonds at the sale date.
  4. credited for the fair value of the bonds at the sale date.
  5. debited for the cost of the bonds at the sale date.

 

 

  1. In accounting for debt investments, entries are made for each of the following except the
  2. acquisition.
  3. interest revenue.
  4. sale.
  5. entries are made for each answer choice.

 

 

  1. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000.

The journal entry to record this investment includes a debit to

  1. Debt Investments for $64,800.
  2. Debt Investments for $60,000.
  3. Cash for $60,000.
  4. Stock Investments for $60,000.

 

 

  1. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000.

Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at December 31, 2014 would include a credit to

  1. Interest Receivable for $2,400.
  2. Interest Revenue for $4,800.
  3. Accrued Expense for $4,800.
  4. Interest Revenue for $2,400.

 

 

 

  1. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000.

If Bay sells all of its Community bonds for $64,500, what gain or loss is recognized?

  1. Loss of $9,300
  2. Loss of $4,500
  3. Gain of $9,300
  4. Gain of $4,500

 

 

  1. Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a
  2. debit to Interest Receivable for $1,250.
  3. credit to Interest Revenue for $1,250.
  4. credit to Interest Revenue for $1,262.50.
  5. credit to Debt Investments for $1,262.50.

 

 

 

  1. Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a
  2. debit to Interest Receivable for $1,250.
  3. debit to Interest Revenue for $1,250.
  4. credit to Interest Revenue for $1,262.50.
  5. debit to Debt Investments for $1,262.50.

 

 

 

  1. Tempest Co. purchased 60, 6% Urich Company bonds for $60,000 cash. Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for $32,000, the entry would include a credit to Gain on Sale of Debt Investments for
  2. $1,600.
  3. $1,750.
  4. $1,800.
  5. $2,000.

 

 

 

 

  1. On January 1, Hamm Company purchased as an investment a $1,000, 6% bond for $1,020. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31?
  2. Interest Receivable……………………………………………………….. 30

Interest Revenue ………………………………………………….                                   30

  1. Debt Investments ……………………………………………………….. 30

Interest Revenue ………………………………………………….                                    30

  1. Interest Receivable……………………………………………………….. 60

Interest Revenue ………………………………………………….                                    60

  1. Debt Investments ……………………………………………………….. 60

Interest Revenue ………………………………………………….                                    60

 

 

 

 

  1. Beak Corporation sells 200 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $25 a share. Beak sold the shares for $40 a share. The entry to record the sale is
  2. Cash…………………………………………………………………………… 5,000

Loss on Sale of Stock Investments …………………………………          3,000

Stock Investments ……………………………………………….                               8,000

  1. Stock Investments ………………………………………………………. 8,000

Cash …………………………………………………………………..                               8,000

  1. Cash…………………………………………………………………………… 8,000

Gain on Sale of Stock Investments …………………………                               3,000

Stock Investments ……………………………………………….                               5,000

  1. Cash…………………………………………………………………………… 8,000

Stock Investments ……………………………………………….                               8,000

 

 

 

 

  1. Yeloe Corporation sells 400 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $60 a share. Yeloe sold the shares for $40 a share. The entry to record the sale is
  2. Cash…………………………………………………………………………… 16,000

Loss on Sale of Stock Investments …………………………………          8,000

Stock Investments ……………………………………………….                             24,000

  1. Cash…………………………………………………………………………… 24,000

Gain on Sale of Stock Investments …………………………                               8,000

Stock Investments ……………………………………………….                             16,000

  1. Cash…………………………………………………………………………… 16,000

Stock Investments ……………………………………………….                               6,000

  1. Stock Investments ………………………………………………………. 16,000

Loss on Sale of Stock Investments …………………………………          8,000

Cash……………………………………………………………………                             24,000

 

 

 

 

  1. Blaine Company had these transactions pertaining to stock investments:

Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.

June 1 Received cash dividends of $2 per share on Horton stock.

Oct. 1 Sold 1,200 shares of Horton stock for $32,400.

The entry to record the purchase of the Horton stock would include a

  1. debit to Stock Investments for $45,900.
  2. credit to Cash for $45,900.
  3. debit to Stock Investments for $51,000.
  4. debit to Investment Expense for $5,100.

 

 

 

  1. Blaine Company had these transactions pertaining to stock investments:

Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.

June 1 Received cash dividends of $3 per share on Horton stock.

Oct. 1 Sold 1,200 shares of Horton stock for $32,400.

The entry to record the receipt of the dividends on June 1 would include a

  1. debit to Stock Investments for $6,000.
  2. credit to Dividend Revenue for $6,000.
  3. debit to Dividend Revenue for $6,000.
  4. credit to Stock Investments for $6,000.

 

 

 

 

  1. Blaine Company had these transactions pertaining to stock investments:

Feb. 1 Purchased 2,000 shares of Norton Company (10%) for $51,000.

June 1 Received cash dividends of $2 per share on Horton stock.

Oct. 1 Sold 1,200 shares of Horton stock for $32,400.

The entry to record the sale of the stock would include a

  1. debit to Cash for $30,600.
  2. credit to Gain on Sale of Stock Investments for $1,200.
  3. debit to Stock Investments for $30,600.
  4. credit to Gain on Sale of Stock Investments for $1,800.

 

 

 

 

  1. Mize Company owns 30% interest in the stock of Lyte Corporation. During the year, Lyte pays $20,000 in dividends to Mize, and reports $300,000 in net income. Mize Company’s investment in Lyte will increase Mize¢s net income by
  2. $6,000.
  3. $90,000.
  4. $96,000.
  5. $10,000.

 

 

 

 

  1. Penny Company owns 20% interest in the stock of Lynn Corporation. During the year, Lynn pays $25,000 in dividends, and reports $200,000 in net income. Penny Company’s investment in Lynn will increase by
  2. $25,000.
  3. $40,000.
  4. $45,000.
  5. $35,000.

 

 

 

  1. On January 1, 2014, Grgante Corporation purchased 25% of the common stock outstanding of Long Corporation for $270,000. During 2014, Long Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments—Long account on the books of Grgante Corporation at December 31, 2014 is
  2. $270,000.
  3. $310,000.
  4. $350,000.
  5. $280,000.

 

 

 

  1. Gayton Corporation purchased 1,000 shares of Smart common stock ($50 par) at $80 per share as a short-term investment. The shares were subsequently sold at $78 per share. The cost of the securities purchased and gain or loss on the sale were

   Cost                      Gain or Loss

  1. $50,000 $2,000 gain
  2. $50,000 $2,000 loss
  3. $80,000 $2,000 gain
  4. $80,000 $2,000 loss

 

 

 

  1. In accounting for stock investments between 20% and 50%, the _______ method is used.
  2. consolidated statements
  3. controlling interest
  4. cost
  5. equity

 

 

  1. When a company holds stock of several different corporations, the group of securities is identified as a(n)
  2. affiliated investment.
  3. consolidated portfolio.
  4. investment portfolio.
  5. controlling interest.

 

 

 

  1. Roxy Corporation makes a short-term investment in 180 shares of Sager Company’s common stock. The stock is purchased for $53 a share. The entry for the purchase is
  2. Debt Investments………………………………………………………… 9,540

Cash……………………………………………………………………                               9,540

  1. Stock Investments……………………………………………………….. 9,540

Cash……………………………………………………………………                               9,540

  1. Stock Investments……………………………………………………….. 9,047

Cash……………………………………………………………………                               9,047

  1. Stock Investments……………………………………………………….. 9,000

Cash……………………………………………………………………                               9,000

 

 

 

  1. Alistair Corporation sells 500 shares of common stock being held as a short-term investment. The shares were acquired six months ago at a cost of $55 a share. Alistair sold the shares for $40 a share. The entry to record the sale is
  2. Cash…………………………………………………………………………… 20,000

Loss on Sale of Stock Investments………………………………….          7,500

Stock Investments………………………………………………..                             27,500

  1. Cash…………………………………………………………………………… 27,500

Gain on Sale of Stock Investments………………………….                               7,500

Stock Investments………………………………………………..                             20,000

  1. Cash…………………………………………………………………………… 20,000

Stock Investments………………………………………………..                             20,000

  1. Stock Investments……………………………………………………….. 20,000

Loss on Sale of Stock Investments………………………………….          7,500

Cash……………………………………………………………………                             27,000

 

 

 

  1. For accounting purposes, the method used to account for long-term investments in common stock is determined by
  2. the amount paid for the stock by the investor.
  3. the extent of an investor’s influence on the operating and financial affairs of the investee.
  4. whether the stock has paid dividends in past years.
  5. whether the acquisition of the stock by the investor was “friendly” or “hostile.”

 

 

  1. If an investor owns less than 20% of the common stock of another corporation as a long-term investment,
  2. the equity method of accounting for the investment should be employed.
  3. no dividends can be expected.
  4. it is presumed that the investor has relatively little influence on the investee.
  5. it is presumed that the investor has significant influence on the investee.

 

 

 

  1. If the cost method is used to account for a long-term investment in common stock, dividends received should be
  2. credited to the Stock Investments account.
  3. credited to the Dividend Revenue account.
  4. debited to the Stock Investments account.
  5. recorded only when 20% or more of the stock is owned.

 

 

  1. If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is
  2. the cost method.
  3. the equity method.
  4. the preparation of consolidated financial statements.
  5. determined by agreement with whomever owns the remaining 90% of the stock.

 

 

  1. The cost method of accounting for long-term investments in stock should be employed when the
  2. investor owns more than 50% of the investee’s stock.
  3. investor has significant influence on the investee and the stock held by the investor are marketable equity securities.
  4. market value of the shares held is greater than their historical cost.
  5. investor’s influence on the investee is insignificant.

 

 

  1. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor
  2. has insignificant influence on the investee and that the cost method should be used to account for the investment.
  3. should apply the cost method in accounting for the investment.
  4. will prepare consolidated financial statements.
  5. has significant influence on the investee and that the equity method should be used to account for the investment.

 

 

  1. Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company,
  2. the Dividend Revenue account is credited.
  3. the Stock Investments account is increased.
  4. the Stock Investments account is decreased.
  5. no entry is necessary.

 

 

 

  1. On January 1, 2014, Lark Corporation purchased 35% of the common stock outstanding of Dinc Corporation for $700,000. During 2014, Dinc Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Stock Investments—Dinc account on the books of Lark Corporation at December 31, 2014 is
  2. $700,000.
  3. $735,000.
  4. $770,000.
  5. $665,000.

 

 

 

  1. Under the equity method, the Stock Investments account is increased when the
  2. investee company reports net income.
  3. investee company pays a dividend.
  4. investee company reports a loss.
  5. stock investment is sold at a gain.

 

 

  1. The account, Stock Investments, is
  2. a subsidiary ledger account.
  3. a long-term liability account.
  4. a long-term investment account.
  5. another name for Debt Investments.

 

 

  1. Which of the following would not be considered a motive for making a stock investment in another corporation?
  2. Appreciation in the market value of the stock investment
  3. Use of the investment for expanding its own operations
  4. Use of the investment to diversify its own operations
  5. An increase in the amount of interest revenue from the stock investment

 

 

  1. Revenue is recognized when cash dividends are received under
  2. the controlling interest method.
  3. the cost method.
  4. the equity method.
  5. both the cost and equity methods.

 

 

  1. Which of the following is the correct matching concerning an investor’s influence on the operations and financial affairs of an investee?

% of Investor Ownership             Presumed Influence

  1. Less than 20% Short-term
  2. Between 20%-50% Significant
  3. More than 50% Long-term
  4. Between 20%-50% Controlling

 

 

 

  1. Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

% of Investor Ownership                        Accounting Guidelines

  1. Less than 20% Cost method
  2. Between 20%–50% Cost method
  3. More than 50% Cost or equity method
  4. Between 20%–50% Consolidated financial statements

 

 

  1. If the cost method is used to account for a long-term investment in common stock,
  2. it is presumed that the investor has significant influence on the investee.
  3. the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
  4. net income of the investee is not considered earned by the investor until dividends are declared by the investee.
  5. the Investment account may be, at times, greater than the acquisition cost.

 

 

  1. If a company acquires a 40% common stock interest in another company,
  2. the equity method is usually applicable.
  3. all influence is classified as controlling.
  4. the cost method is usually applicable.
  5. the ability to exert significant influence over the activities of the investee does not exist.

 

 

  1. If a common stock investment is sold at a gain, the gain
  2. is reported as operating revenue.
  3. is reported under a special section, “Discontinued investments,” on the income statement.
  4. is reported in the Other revenues and gains section of the income statement.
  5. contributes to gross profit on the income statement.

 

 

  1. If the equity method is being used, cash dividends received
  2. are credited to Dividend Revenue.
  3. require no entry because investee net income has already been recorded at the proper proportion on the investor’s books.
  4. are credited to the Stock Investments account.
  5. are credited to the Revenue from Stock Investments account.

 

 

  1. If the equity method is being used, the Revenue from Stock Investments account is
  2. just another name for a Dividend Revenue account.
  3. credited when dividends are declared by the investee.
  4. credited when net income is reported by the investee.
  5. debited when dividends are declared by the investee.

 

 

 

  1. Under the equity method, the Stock Investments account is credited when the
  2. investee reports net income.
  3. investee reports a net loss.
  4. investment is originally acquired.
  5. investee reports net income and when the investment is originally acquired.

 

 

  1. On August 1, Masters Company buys 2,000 shares of ABD common stock for $72,500 cash. On December 1, the stock investments are sold for $75,000 in cash. Which of the following are the correct journal entries to record for the purchase and sale of the common stock?
  2. Aug. 1 Cash………………………………………………..        72,500

Stock Investments……………………….                                72,500

Dec. 1     Cash………………………………………………..        75,000

Stock Investments……………………….                                72,500

Gain on Sale of Stock Investments                                      2,500

 

  1. Aug. 1 Stock Investments…………………………….        72,500

Cash…………………………………………..                                72,500

Dec. 1     Cash………………………………………………..        75,000

Stock Investments……………………….                                72,500

Gain on Sale of Stock Investments                                      2,500

 

  1. Aug. 1 Stock Investments…………………………….        72,500

Cash…………………………………………..                                 72,500

Dec. 1     Stock Investments…………………………….        75,000

Cash…………………………………………..                                72,500

Gain on Sale of Stock Investments                                      2,500

 

  1. Aug. 1 Cash………………………………………………..        72,500

Stock Investments……………………….                                72,500

Dec. 1     Stock Investments…………………………….        75,000

Cash…………………………………………..                                72,500

Gain on Sale of Stock Investments                                      2,500

 

 

 

  1. Cody Industries owns 35% of Macarthy Company. For the current year, Macarthy reports net income of $250,000 and declares and pays a $60,000 cash dividend. Which of the following correctly presents the journal entries to record Cody’s equity in Macarthy’s net income and the receipt of dividends from Macarthy?
  2. Dec. 31 Stock Investments………………………………      87,500

Revenue from Stock Investments ….                            87,500

Dec. 31   Cash…………………………………………………        21,000

Stock Investments…………………………                              21,000

  1. Dec. 31 Stock Investments……………………………….      87,500

Revenue from Stock Investments ….                            87,500

Dec. 31   Cash………………………………………………….      60,000

Stock Investments………………………….                              60,000

  1. Dec. 31 Stock Investments…………………………….        66,500

Revenue from Stock Investments …                                66,500


MC 91.        (cont.)
  1. Dec. 31 Revenue from Stock Investments ……….   87,500

Stock Investments……………………….                              87,500

Dec. 31   Stock Investments……………………………..        21,000

Cash……………………………………………                                21,000

 

 

  1. On January 1, 2014, Gene Corp. paid $800,000 for 100,000 shares of Onofine Company’s common stock, which represents 30% of Onofine¢s outstanding common stock. Onofine reported net income of $200,000 and paid cash dividends of $60,000 during 2014. Gene should report the investment in Onofine Company on its December 31, 2014, balance sheet at:
  2. $800,000
  3. $758,000
  4. $818,000
  5. $842,000

 

 

  1. Viejo Inc. earns $600,000 and pays cash dividends of $150,000 during 2014. Cruz Corporation owns 73,500 of the 210,000 outstanding shares of Viejo.

What amount should Cruz show in the investment account at December 31, 2014 if the beginning of the year balance in the account was $40,000?

  1. $197,500
  2. $210,000
  3. $157,500
  4. $250,000

 

 

  1. Cruz Inc. earns $450,000 and pays cash dividends of $150,000 during 2014. Cruz Corporation owns 73,500 of the 210,000 outstanding shares of Viejo.

How much revenue from investment should Viejo report in 2014?

  1. $52,500
  2. $105,000
  3. $157,500
  4. $210,000

 

 

 

  1. On January 1, 2014, Dumas Industries acquired a 18% interest in Arlongton Corporation through the purchase of 12,000 shares of Arlongton Corporation common stock for $250,000. During 2014, Arlongton Corp. paid $60,000 in dividends and reported a net loss of $90,000. Dumas is able to exert significant influence on Arlongton. However, Dumas mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Dumas’s investment using the equity method?


MC 95.        (cont.)

 

      Investment                                         Net

Account                                   Earnings (loss)

  1. $90,000             ($30,000)
  2. $223,000 ($16,200)
  3. $233,800 ($16,200)
  4. $233,800 ($5,400)

 

 

 

  1. Consolidated financial statements are prepared when a company owns _________ of the common stock of another company.
  2. less than 20%
  3. between 20% and 50%
  4. less than 50%
  5. more than 50%

 

 

  1. Consolidated financial statements present all of the following except the
  2. individual assets and liabilities of the parent company
  3. individual assets and liabilities of the subsidiary.
  4. total revenues and expenses of the subsidiary.
  5. All of these are presented in consolidated financial statements.

 

 

  1. The company whose stock is owned by the parent company is called the
  2. controlled company.
  3. subsidiary company.
  4. investee company.
  5. sibling company.

 

 

  1. A company that owns more than 50% of the common stock of another company is known as the
  2. charge company.
  3. subsidiary company.
  4. parent company.
  5. management company.

 

 

  1. If one company owns more than 50% of the common stock of another company,
  2. the cost method should be used to account for the investment.
  3. a partnership exists.
  4. a parent-subsidiary relationship exists.
  5. the company whose stock is owned must be liquidated.

 

 

 

  1. If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

Legal          Economic

  1. 3 3
  2. 1 2
  3. 3 1
  4. 2 1

 

 

  1. When a company owns more than 50% of the common stock of another company,
  2. affiliated financial statements are prepared.
  3. consolidated financial statements are prepared.
  4. controlling financial statements are prepared.
  5. significant financial statements are prepared.

 

 

  1. Changes from cost are reported as part of net income for
  2. available-for-sale securities.
  3. held-to-maturity securities.
  4. debt securities.
  5. trading securities.

 

 

  1. Short-term investments are listed on the balance sheet immediately below
  2. cash.
  3. inventory.
  4. accounts receivable.
  5. prepaid expenses.

 

 

  1. Short-term stock investments should be valued on the balance sheet at
  2. the lower of cost or fair value.
  3. the higher of cost or fair value.
  4. cost.
  5. fair value.

 

 

  1. In recognizing a decline in the fair value of short-term stock investments, an unrealized loss account is debited because
  2. management intends to realize this loss in the near future.
  3. the securities have not been sold.
  4. the stock market is volatile.
  5. management cannot determine the exact amount of the loss in value.

 

 

  1. The Fair Value Adjustment account
  2. is set up for each security in the company’s portfolio.
  3. relates to the entire portfolio of securities held by the company.
  4. is closed at the end of each accounting period.
  5. appears on the income statement as Other Expenses and Losses.

 

 

  1. The contra-account, Fair Value Adjustment, is also called a(n)
  2. offset account.
  3. adjustment account.
  4. valuation account.
  5. opposite account.

 

 

  1. Reporting investments at fair value is
  2. applicable to stock securities only.
  3. applicable to debt securities only.
  4. applicable to both debt and stock securities.
  5. a conservative approach because only losses are recognized.

 

 

  1. Brandy Corporation’s trading portfolio at the end of the year is as follows:

 

        Security                        Cost                           Fair Value

Common Stock C                $10,000                         $12,000

Common Stock D                  9,000                            5,000

$19,000                         $17,000

 

At the end of the year, Brandy Corporation should

  1. set up a Fair Value Adjustment account for Stock D.
  2. set up a Fair Value Adjustment account for the portfolio.
  3. recognize an Unrealized Gain or Loss—Income for $4,000.
  4. report a loss on the income statement for $4,000 under “Other expenses and losses.”

 

 

  1. Brandy Corporation’s trading portfolio at the end of the year is as follows:

 

        Security                        Cost                           Fair Value

Common Stock C                $10,000                         $12,000

Common Stock D                  8,000                            5,000

$18,000                         $17,000

 

Brandy subsequently sells Stock D for $10,000. What entry is made to record the sale?

  1. Cash…………………………………………………………………………… 10,000

Stock Investments………………………………………………..                             10,000

  1. Cash…………………………………………………………………………… 10,000

Fair Value Adjustment Trading………………………………                               2,000

Stock Investments………………………………………………..                               8,000

  1. Cash…………………………………………………………………………… 10,000

Stock Investments………………………………………………..                               8,000

Gain on Sale of Stock Investments………………………….                               2,000

  1. Cash…………………………………………………………………………… 10,000

Stock Investments………………………………………………..                               5,000

Gain on Sale of Stock Investments………………………….                               5,000

 

 

 

 

  1. Which of the following would not be reported under “Other Revenues and Gains” on the income statement?
  2. Unrealized gain on available-for-sale securities
  3. Dividend revenue
  4. Interest revenue
  5. Gain on sale of short-term debt investments

 

 

  1. The balance in the Unrealized Gain or Loss—Equity account will
  2. appear on the balance sheet as a contra asset.
  3. appear on the income statement under Other Expenses and Losses.
  4. appear as a deduction in the stockholders’ equity section.
  5. not be shown on the financial statements until the securities are sold.

 

 

  1. If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss
  2. is not required since the share prices will likely rebound in the long run.
  3. will show a debit to an expense account.
  4. will show a credit to a contra-asset account that appears in the stockholders’ equity section of the balance sheet.
  5. will show a debit to an unrealized loss account that is deducted in the stockholders’ equity section of the balance sheet.

 

 

  1. The balance sheet presentation of an unrealized loss on an available-for-sale security is similar to the statement presentation of
  2. treasury stock.
  3. discount on bonds payable.
  4. allowance for doubtful accounts.
  5. prepaid expenses.

 

 

  1. At the end of its first year, the trading securities portfolio consisted of the following common stocks.

 Cost           Fair Value

Atrium Corporation   $ 46,500         $ 50,000

Barnes Inc.                     60,000            58,000

Cantor Corporation       80,000            76,400

$186,500         $184,400

 

The unrealized loss to be recognized under the fair value method is

  1. $2,000.
  2. $5,600.
  3. $2,100.
  4. $3,600.

 

 

 

 

  1. At the end of its first year, the trading securities portfolio consisted of the following common stocks.

 Cost           Fair Value

Atrium Corporation   $ 46,500         $ 50,000

Barnes Inc.                     60,000            58,000

Cantor Corporation       80,000            76,400

$186,500         $184,400

 

In the following year, the Barnes common stock is sold for cash proceeds of $57,000. The gain or loss to be recognized on the sale is a

  1. gain of $1,200.
  2. loss of $3,000.
  3. Loss of $1,000.
  4. loss of $2,000.

 

 

 

  1. At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. Total fair value is $250,000. The financial statements should show
  2. an addition to an asset of $5,000 and a realized gain of $5,000.
  3. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’ equity section.
  4. an addition to an asset of $5,000 in the current assets section and an unrealized gain of $5,000 in “Other revenues and gains.”
  5. an addition to an asset of $5,000 in the current assets section and a realized gain of $5,000 in “Other revenues and gains.”

 

 

  1. Comanic Corp. has common stock of $5,400,000, retained earnings of $2,000,000, unrealized gains on trading securities of $100,000 and unrealized losses on available-for-sale securities of $200,000. What is the total amount of its stockholders’ equity?
  2. $7,200,000
  3. $7,400,000
  4. $7,300,000
  5. $7,500,000

 

 

 

  1. Cost and fair value data for the trading securities of McMahon Company at December 31, 2014, are $110,000 and $85,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value?

 

  1. Dec. 31      Unrealized Loss¾Income………………..          25,000

Trading Securities………………………                                  25,000

  1. Dec. 31      Unrealized Gain¾Income…………………          25,000

Trading Securities……………………….                                  25,000

  1. Dec. 31      Unrealized Loss¾Income…………………          25,000

Fair Value Adjustment¾Trading….                                  25,000


MC 120.      (cont.)
  1. Dec. 31            Fair Value Adjustment -Trading                  25,000

Unrealized Gain-Income………………                                  25,000

 

 

 

  1. At December 31, 2014, the trading securities for Saddle, Inc. are as follows:

 

Security           Cost                Fair Value 12/31/14

A               $90,000                       $94,000

B               150,000                       141,000

C               32,000                         30,000

 

Saddle should report the following amount related to the securities in its 2014 income statement:

 

  1. $4,000 gain
  2. $7,000 realized loss.
  3. $7,000 unrealized loss.
  4. $11,000 unrealized loss.

 

 

 

  1. At December 31, 2014, Delta Inc. has these data on its security investments:

 

Security                          Cost                        Fair Value 12/31/14

Trading                        $ 140,000                           $190,000

Available-for-sale           137,000                             122,000

 

If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value?

 

  1. Securities…………………………………………………..          35,000

Unrealized Gain¾Income…………………….                                  35,000

 

  1. Unrealized Loss¾Income……………………………          15,000

Securities……………………………………………………          35,000

Unrealized Gain¾Income…………………….                                  50,000

 

  1. Fair Value Adjustment¾Trading………………….          50,000

Unrealized Gain¾Income…………………….                                  50,000

Unrealized Gain or Loss¾Equity…………………          15,000

Fair Value Adjustment¾Available-for-Sale                                 15,000

 

  1. Unrealized Gain¾Income……………………………          50,000

Fair Value Adjustment¾Trading…………..                                  50,000

Fair Value Adjustment¾Available-for-Sale…….        15,000

Unrealized Gain or Loss¾Equity…………..                                 15,000

 

 

 

  1. All of the following statements about short-term investments are true except:
  2. Short-term investments are also called marketable securities
  3. Trading securities are always classified as short-term investments.
  4. Short-term investments are listed below accounts receivable in the current asset section of the balance sheet.
  5. Short-term assets must be readily marketable.

 

 

  1. Available-for-sale securities are classified as
  2. short-term investments only.
  3. long-term investments only.
  4. either short-term or long-term investments.
  5. current assets only.

 

 

  1. Which one of the following would not be classified as a short-term investment?
  2. Marketable stock securities
  3. Equity method investments
  4. Marketable debt securities
  5. Short-term paper

 

 

  1. Short-term investments are securities that are readily marketable and intended to be converted into cash within the next
  2. year.
  3. two years.
  4. year or operating cycle, whichever is shorter.
  5. year or operating cycle, whichever is longer.

 

 

  1. Which of the following would not be classified as a short-term investment?
  2. Short-term commercial paper
  3. Idle cash in a bank checking account
  4. Marketable stock securities
  5. Marketable debt securities

 

 

  1. If a parent company acquires wholly owned subsidiary at an amount greater than the book value, the excess should be
  2. allocated to expense on the date of acquisition.
  3. allocated to identifiable assets to the extent of their fair values, with any remainder allocated to goodwill.
  4. allocated to goodwill, with any remainder allocated to the identifiable assets.
  5. set up as a liability to the controlling interest.

 

 

 

  1. The consolidated worksheet shows Excess of Cost Over Book Value of Subsidiary of $210,000. Management of the parent company determines that the market values for subsidiary company plant assets are $90,000 higher than book values. In the consolidated balance sheet, goodwill will be reported at
  2. $210,000.
  3. $120,000.
  4. $90,000.
  5. $0.

 

 

  1. Daniel Corporation acquired 100% of the common stock of Tysen Company for $1,100,000. On the date of acquisition, Tysen Company’s stockholders’ equity consisted of: Common Stock, $530,000; Retained Earnings, $410,000. The intercompany elimination to be made on a worksheet to prepare a consolidated balance sheet is

a… Common Stock–Tysen…………………………………………….       530,000

….. Retained Earnings–Tysen…………………………………………       410,000

Investment in Tysen Stock………………………………….                                     940,000

b… Investment in Tysen Stock……………………………………….    1,100,000

Cash…………………………………………………………………                                  1,100,000

c… Common Stock–Daniel…………………………………………….       530,000

….. Retained Earnings–Daniel…………………………………………       410,000

….. Goodwill………………………………………………………………..       160,000

Investment in Tysen Stock………………………………….                                  1,100,000

d… Common Stock–Tysen…………………………………………….       530,000

….. Retained Earnings–Tysen…………………………………………       410,000

….. Excess of Cost Over Book Value of Subsidiary……………       160,000

Investment in Tysen Stock………………………………….                                  1,100,000

 

 

  1. A consolidated income statement will show
  2. revenue and expense transactions between the consolidated entity and parties outside the affiliated group.
  3. only the parent company’s net income.
  4. only the income of partially owned subsidiaries.
  5. only the income of wholly owned subsidiaries.

 

 

  1. When preparing a consolidated income statement,
  2. only the revenues and expenses of the parent company are presented.
  3. the income from partially owned subsidiaries is excluded.
  4. all revenue and expense transactions between the parent and subsidiaries must be eliminated.
  5. intercompany transactions between affiliated companies do not have to be eliminated.

 

 

 

 

  1. Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or stock securities?
  2. The company may have excess cash.
  3. The company may generate a significant portion of its earnings from investment income.
  4. The company may invest for the strategic reason of establishing a presence in a related industry.
  5. The company may invest for speculative reasons to increase the value in pension funds.

 

 

  1. When bonds are sold, the gain or loss on sale is the difference between the
  2. sales price and the cost of the bonds.
  3. net proceeds and the cost of the bonds.
  4. sales price and the market value of the bonds.
  5. net proceeds and the market value of the bonds.

 

 

  1. Debt investments are recorded at the
  2. face value of the bonds purchased.
  3. face value of the bonds purchased plus interest.
  4. price paid for the bonds plus interest.
  5. price paid for the bonds plus brokerage fees.

 

 

  1. Under the equity method, the investor records dividends received by crediting
  2. Dividend Revenue.
  3. Investment Income.
  4. Revenue from Investment.
  5. Stock Investments.

 

 

  1. A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using
  2. the cost method.
  3. the equity method.
  4. the significant method.
  5. consolidated financial statements.

 

 

  1. The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment
  2. is composed of common stock and it is the investor’s intent to vote the common stock.
  3. ensures a source of supply of raw materials for the investor.
  4. enables the investor to exercise significant influence over the investee.
  5. is obtained by an exchange of stock for stock.

 

 

 

  1. On January 2, Angle Corporation acquired 40% of the outstanding common stock of Bobbe Company for $550,000. For the year ended December 31, Bobbe reported net income of $90,000 and paid cash dividends of $30,000 on its common stock. At December 31, the carrying value of Angle’s investment in Bobbe under the equity method is
  2. $538,000.
  3. $550,000.
  4. $586,000.
  5. $574,000.

 

 

 

  1. An unrealized loss on available-for-sale securities is
  2. reported under Other Expenses and Losses in the income statement.
  3. closed-out at the end of the accounting period.
  4. reported as a separate component of stockholders’ equity.
  5. deducted from the cost of the investment.

 

 

  1. Securities bought and held primarily for sale in the near term to generate income on short-term price differences are
  2. trading securities.
  3. available-for-sale securities.
  4. never-sell securities.
  5. held-to-maturity securities.

 

 

  1. Short-term investments are
  2. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is shorter.
  3. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is longer.
  4. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is longer.
  5. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is shorter.

 

 

  1. Short-term investments are securities held by a company that are
  2. readily marketable.
  3. intended to be converted into cash within the next year.
  4. readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.
  5. readily marketable and intended to be held until maturity.

 

 

 

  1. Debt investments that are held to maturity are recorded at
  2. amortized cost.
  3. fair value.
  4. original cost.
  5. maturity value.

 

 

  1. Under IFRS, equity investments are generally recorded and reported at
  2. amortized cost.
  3. fair value.
  4. original cost.
  5. maturity value.

 

 

  1. Which of the following investment classifications are the same for GAAP and IFRS?
  2. Available-for-sale
  3. Held-to-maturity
  4. Non-trading
  5. Trading.

 

 

  1. Which of the following are accounted for at amortized cost under IFRS?
  2. Available-for-sale investments
  3. Trading investments
  4. Non-trading equity investments
  5. Held-for-collection investments

 

 

  1. Unrealized gains and losses related to available-for-sale/non-trading equity investments are reported in other comprehensive income under
  2. GAAP only.
  3. IFRS only.
  4. Both GAAP and IFRS.
  5. Neither GAAP or IFRS.

 

 


 

BRIEF Exercises

 

BE 149

On January 14, Balcom Corporation purchased 20, 11%, $1,000 Eiger Company bonds for $20,000. On November 30, the company sold 10 of the Eiger Company bonds for $11,600. Prepare journal entries for the purchase and sale of the Eiger Company bonds.

 

 

BE 150

On January 2, Penny Company purchased 45, 10%, $1,000 Mikel Company bonds for $45,000 cash. Interest is payable semiannually on July 1 and January 1. On July 1, the company received a semiannual interest payment on the Mikel Company bonds. Journalize the entries to record the purchase of the bonds and the receipt of the interest payment.

 

 

BE 151

On April 25, Davis Company buys 4,200 shares of Carter common stock for $94,500. On October 31, Davis sells 600 shares of Carter stock for $16,500,. Prepare journal entries for the purchase and sale of the Carter common stock.

 

 

BE 152

On January 1, Sanchez Corporation purchased a 35% equity in Lawton Company for $380,000. At December 31, Lawton declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Sanchez Corporation.

 

 

BE 153

Jenner Company had the following transactions pertaining to its short-term stock investments.

 

Jan.       1      Purchased 600 shares of Pork Company stock for $8,420.

 

June      1      Received cash dividends of $0.60 per share on the Pork Company stock.

 

Sept.   15      Sold 300 shares of the Pork Company stock for $3,400 Cash.

Instructions

Journalize the transactions.

 

 

BE 154

On January 1, 2014, Mink Company purchased 5,000 shares of Kusher Company stock for $360,000. Mink’s investment represents 30 percent of the total outstanding shares of Kusher. During 2014, Kusher paid total dividends of $100,000 and reported net income of $300,000. What revenue does Mink report related to this investment and what is the amount to be reported as an investment in Kusher stock at December 31?

 

 

BE 155

At January 1, 2014, the trading securities portfolio held by the Darren Corporation consisted of the following investments:

 

  1. 2,000 shares of Temper common stock purchased for $42 per share.
  2. 1,500 shares of Logan common stock purchased for $50 per share.

 

At December 31, 2014, the fair values per share were Temper $38 and Logan $54.

 

Instructions

(a)   Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2014.

(b)   Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014.

 

 

BE 156

At December 31, 2014, the trading securities for Eddy Company are as follows:

 

Security            Cost           Fair Value

A              $16,000           $20,000

B              34,000           32,000

$50,000           $52,000

 

Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.

 

BE 157

At January 1, 2014, Grand Corporation held one available-for-sale security: 1,500 shares of Nettle common stock purchased for $40 per share. At December 31, 2014, the fair value per share for Nettle was $42. Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014.

 

 

BE 158

Terra Cotta Company has the following data at December 31, 2014 for its securities:

 

Securities                     Cost           Fair Value

Available-for-sale       $34,000           $39,000

Trading                        46,000            42,000

 

Instructions

Journalize the December 31 adjusting entries.

 

 

 

Exercises

Ex. 159

Maxim Corporation had the following transactions pertaining to debt investments.

Jan. 1      Purchased 80, 8%, $1,000 Woodrow Company bonds for $80,000.

July 1     Sold 20 Woodrow Company bonds for $21,500.

 

Instructions

Prepare journal entries for the purchase and sale of the Woodrow Company bonds.

 

 

Ex. 160

Quagle Company had the following transactions pertaining to debt securities held as a short-term investment.

Jan.  1    Purchased 40, 8%, $1,000 Steve Company bonds for $40,000 cash. Interest is payable semiannually on July 1 and January 1.

July  1    Received semiannual interest on Steve Company bonds.

Oct.  1    Sold 24 Steve Company bonds for $26,000 plus accrued interest.

 

Instructions

(a)   Journalize the transactions.

(b)   Prepare the adjusting entry for the accrual of interest on December 31.

 

Ex. 161

Pincher Company purchased 50 Issac Company 12%, 10-year, $1,000 bonds on January 1, 2014, for $50,000. The bonds pay interest semiannually. On January 1, 2015, after receipt of interest, Pincher Company sold 30 of the bonds for $28,300.

 

Instructions

Prepare the journal entries to record the transactions described above.

 

 


Ex. 162

The following transactions were made by Allen Company. Assume all investments are short-term and are readily marketable.

June      2      Purchased 400 shares of Snoop Corporation common stock for $45 per share.

July      1      Purchased 200 Barr Corporation bonds for $228,000.

30      Received a cash dividend of $1.50 per share from Snoop Corporation.

Sept.   15      Sold 120 shares of Snoop Corporation stock for $50 per share.

Dec.    31      Received semiannual interest check for $13,000 from Barr Corporation.

31      Received a cash dividend of $2 per share from Snoop Corporation.

 

Instructions

Journalize the transactions.

 

Ex. 163

On April 1, Sign Company buys 4,000 shares of Polk common stock for $61,500. On October 1, Sign sells 1,000 shares of Polk stock for $20,500..

Instructions

Prepare journal entries for the purchase and sale of the Polk common stock.

 

 

Ex. 164

Hungh Company had the following transactions pertaining to short-term investments in equity securities.

Jan.       1      Purchased 1,500 shares of Antuni Company stock for $9,500 cash.

June      1      Received cash dividends of $.40 per share on Antuni Company stock.

Sept.   15      Sold 375 shares of Antuni Company stock for $2,300 less brokerage fees of $100.

Dec.      1      Received cash dividends of $.80 per share on Antuni Company stock.

Instructions

(a)   Journalize the transactions.

(b)   Indicate the income statement effects of the transactions.

 

Ex. 165

Stewart Corporation’s balance sheet at December 31, 2013, showed the following:

Short-term investments, at fair value                                      $46,500

 

Stewart Corporation’s trading portfolio of stock investments consisted of the following at December 31, 2013:

            Stock                                       Number of Shares            Cost  

Conn Common Stock                                   200                       $28,000

Ares Preferred Stock                                    400                           6,000

Hall Common Stock                                     300                          9,000

$43,000

 

During 2014, the following transactions took place:

Feb.      5      Sold 100 shares of Conn common stock for $18,000.

Mar.   30      Purchased 25 shares of Hall common stock for $1,000.

Sept.     9      Purchased 50 shares of Hall common stock for $3,000.

 

At year end on December 31, 2014, the fair values per share were:

Fair Value Per Share

Conn Common Stock                                        $158.00

Ares Preferred Stock                                           $14.00

Hall Common Stock                                            $24.00

 

Instructions

(a)    Prepare the journal entries to record the 2014 stock transactions.

(b)    On December 31, 2014, prepare any adjusting entry that might be necessary relative to the trading portfolio.

(c)    Show how the stock investments will appear on Stewart Corporation’s balance sheet at December 31, 2014.

 

Ex. 166

On January 5, 2014, Grouse Company purchased the following stock securities as a long-term investment:

 

300 shares Bonter Corporation common stock for $4,500.

500 shares Wane Corporation common stock for $10,000.

800 shares Strauss Corporation common stock for $22,800.

 

Assume that Grouse Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments.

 

On June 30, 2014, Grouse Company received the following cash dividends:

 

Bonter Corporation…………………………………             $2.00 per share

Wane Corporation…………………………………..             $1.25 per share

Strauss Corporation…………………………………             $1.50 per share

 

On November 15, 2014, Grouse Company sold 160 shares of Strauss Corporation common stock for $7,200.

 

On December 31, 2014, the fair value of the securities held by Grouse Company is as follows:

 

Per Share

Bonter Corporation common stock                      $10

Wane Corporation common stock                          16

Strauss Corporation common stock                       28

 

Instructions

Prepare the appropriate journal entries that Grouse Company should make on the following dates:

 

January 5, 2014

June 30, 2014

November 15, 2014

December 31, 2014

 

Ex. 167

Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a long-term investment for $900,000. During the year, Paxton Corporation reported net income of $300,000 and paid dividends of $100,000.

 

Instructions

(a)     Assuming that the 35,000 shares represent a 10% interest in Paxton Corporation:

  1. Prepare the journal entry to record the investment in Paxton stock.
  2. Prepare any entries that Rosco Company should make in accounting for its investment in Paxton stock during the year.
  3. What is the balance of the Stock Investments account on Rosco Company’s books at the end of the year?

 

(b)    Repeat requirement (a) above except assume that the 35,000 shares represent a 20% interest in Paxton Corporation.

 

 

Ex. 168

On January 1, Oetry Corporation purchased a 35% equity in Selig Company for $190,000. At December 31, Selig declared and paid a $50,000 cash dividend and reported net income of $80,000.

 

Instructions

Prepare the necessary journal entries for Oetry Corporation.

 

Ex. 169

Information pertaining to long-term stock investments in 2014 by Bell Corporation follows:

 

Acquired 18% of the 250,000 shares of common stock of Kansas Company at a total cost of $8 per share on January 1, 2014. On July 1, Kansas Company declared and paid a cash dividend of $2 per share. On December 31, Kansas’s reported net income was $654,000 for the year.

 

Obtained significant influence over Toto Company by buying 30% of Toto’s 100,000 outstanding shares of common stock at a total cost of $22 per share on January 1, 2014. On June 15, Toto Company declared and paid a cash dividend of $1.50 per share. On December 31, Toto’s reported net income was $280,000.

 

Instructions

Prepare all necessary journal entries for 2014 for Bell Corporation.

 

 

 

Ex. 170

On February 1, Brutus Company purchased 1,000 shares (2% ownership) of Wynne Company common stock for $25 per share. On March 20, Brutus Company sold 200 shares of Wynne stock for $4,700. Brutus received a dividend of $1.20 per share on April 25. On June 15, Marcus sold 300 shares of Wynne stock for $8,500.

 

Instructions

Prepare the journal entries to record the transactions described above.

 

Ex. 171

On January 1 Jarret Corporation purchased a 35% equity in Dorman Corporation for $220,000. At December 31 Dorman declared and paid a $60,000 cash dividend and reported net income of $200,000.

 

Instructions

(a) Journalize the transactions.

(b) Determine the amount to be reported as an investment in Dorman stock at December 31.

 

Ex. 172

 

Presented below are two independent situations.

 

  1. Guo Cosmetics acquired 10% of the 200,000 shares of common stock of Chy Fashion at a total cost of $12 per share on March 18, 2014. On June 30, Chy declared and paid a $50,000 dividend. On December 31, Chy reported net income of $110,000 for the year. At December 31, the market price of Chy Fashion was $15 per share. The stock is classified as available-for-sale.
  2. Liptin, Inc., obtained significant influence over Blurr Corporation by buying 25% of Blurr 50,000 outstanding shares of common stock at a total cost of $7 per share on January 1,   2014. On June 15, Blurr declared and paid a cash dividend of $40,000. On December   31, Blurr reported a net income of $90,000 for the year.

 

Instructions

Prepare all the necessary journal entries for 2014 for (a) Guo Cosmetics and (b) Liptin, Inc.

 

Ex. 173

At December 31, 2014, the available-for-sale securities for Allison, Inc. are as follows.

 

Security                          Cost             Fair Value

X                             $27,500             $24,000

Y                             12,500             13,000

Z                             23,000             18,000

$63,000             $55,000

 

 

 

Ex. 173         (Cont.)

Instructions

(a)    Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.

(b)   Show the balance sheet and income statement presentation at December 31, 2014, after         adjustment to fair value. The securities are considered to be a long-term investment.

 

 

Ex. 174

At December 31, 2014, the trading securities for Wolfe Company are as follows:

 

Security            Cost           Fair Value

X              $25,000           $27,000

Y              45,000           38,000

$70,000           $65,000

 

Instructions

Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.

 

 

Ex. 175

Plotner Corporation has the following trading portfolio of stock investments as of December 31, 2014.

 

Security                       Cost                      Fair Value

A                          $19,000                       $15,000

B                            22,000                         27,000

C                          34,000                       29,000

$75,000                       $71,000

 

On January 22, 2015, Plotner Corporation sold security C for $32,000.

 

Ex. 175         (Cont.)

Instructions

(a)     Prepare the adjusting entry for Plotner Corporation on December 31, 2014, to report the portfolio at fair value.

(b)    Indicate the balance sheet and income statement presentation of the fair value data for Plotner Corporation at December 31, 2014.

(c)     Prepare the journal entry for the 2015 sale.

 

 

Ex. 176

The following information is available for Lewis Corporation’s available-for-sale securities at December 31, 2014.

 

Security          Cost                Fair Value

X              $34,000                $30,000

Y              24,000                32,000

$58,000                $62,000

 

Instructions

Prepare the adjusting entry to record the securities at fair value at December 31, 2014.

 

Ex. 177

At January 1, 2014, the available-for-sale securities portfolio held by Hyde Corporation consisted of the following investments:

  1. 2,500 shares of Park common stock purchased for $42 per share.
  2. 1,500 shares of Grace common stock purchased for $60 per share.

At December 31, 2014, the market values per share were Park $36 and Grace $68.

 

Instructions

(a)   Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2014.

(b)   Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014.

 

 

Ex. 178

Shallot Company has the following data at December 31, 2014 for its securities.

Securities                     Cost           Fair Value

Trading                       $90,000           $93,000

Available-for-sale         74,000             68,000

 

Instructions

(a)     Prepare the adjusting entries to report the securities at fair value.

(b)    Indicate the statement presentation of the related unrealized gain (loss) accounts for each class of securities.

 

 

 


Ex. 179

On January 2, 2015, Parr Company purchased 100% of the common stock of Sneed Company for $420,000. The fair value of Sneed Company’s assets and liabilities are equal to their book values except that land has a fair value of $120,000 and buildings have a fair value of $260,000.

 

Instructions

(a)     Complete the worksheet below for preparing a consolidated balance sheet. You may add accounts to the worksheet if necessary.

(b)    Prepare a consolidated balance sheet for Parr Company and Subsidiary on January 2, 2015.

 

 

PARR COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

Assets

Parr
Company

Sneed
Company

Eliminations

Consolidated      Data     

Debits

Credits

Current assets

$30,000

$40,000

Investment in Sneed common stock

420,000

Land

50,000

80,000

Buildings (net)

150,000

170,000

               

Totals

650,000

290,000

               

Liabilities and Stockholders’ Equity

Current liabilities

40,000

30,000

Common stock–Parr

370,000

Common stock–Sneed

200,000

Retained earnings–Parr

240,000

Retained earnings–Sneed

             

  60,000

            

            

              

Total

650,000

290,000

            

            

              

 

Solution 179     (17–22 min.)
(a)                                            PARR COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

Assets

Parr
Company

Sneed
Company

Eliminations

Consolidated      Data     

Debits

Credits

Current assets

30,000

$40,000

70,000

Investment in Sneed common stock

420,000

420,000

Land

50,000

80,000

130,000

Buildings (net)

150,000

170,000

320,000

Excess of cost over book

 

     Value of subsidiary

            

            

160,000

160,000

Totals

650,000

290,000

680,000

Liabilities and Stockholders’ Equity

Current liabilities

40,000

30,000

70,000

Common stock–Parr

370,000

370,000

Common stock–Sneed

200,000

200,000

Retained earnings–Parr

240,000

240,000

Retained earnings–Sneed

             

  60,000

  60,000

            

             

Total

650,000

290,000

420,000

420,000

680,000

(b)                                            PARR COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

 

Consolidated      Data     

 

 

Assets

Current assets

$ 70,000

Land

170,000

Buildings (net)

410,000

Goodwill

 

 

   30,000

 

 

$680,000

Liabilities and Stockholders’ Equity

Current liabilities

$ 70,000

Common stock

370,000

Retained earnings

240,000

 

 

 

 

$680,000

 


Ex. 180

On January 2, 2015, Pine Company purchased 100% of the outstanding common shares of Seely Company for $520,000. Any excess of cost over the book value of the net assets of Seely Company should first be allocated to Land $55,000, and Buildings $40,000 and any remainder to goodwill.

Instructions

(a)     Complete the following worksheet below for preparing a consolidated balance sheet on the date of acquisition. You may add accounts to the worksheet that may be necessary.

(b)    Prepare a consolidated balance sheet for Pine Company and Subsidiary on January 2, 2015.

PINE COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

Assets

Pine
Company

Seely
Company

Eliminations

Consolidated      Data     

Debits

Credits

Current assets

120,000

$70,000

Investment in Sneed common stock

520,000

Land

20,000

150,000

Buildings (net)

150,000

250,000

               

Totals

810,000

470,000

               

Liabilities and Stockholders’ Equity

Current liabilities

60,000

70,000

Common stock–Pine

500,000

Common stock–Seely

270,000

Retained earnings–Pine

250,000

Retained earnings–Seely

             

 130,000

            

            

              

Total

810,000

470,000

            

            

              

 

Ex. 181

The separate balance sheets of Platt Company and its wholly owned subsidiary, Speer Company, as of the date of acquisition are shown below.

 

Assets        Platt              Speer         Consolidated      Data     
Cash $     170,000 $       57,000
Accounts Receivable 240,000 283,000
Inventory 100,000 300,000
Equipment (net) 300,000 486,000
Investment in Speer Co.        810,000                   
Totals $1,620,000 $1,126,000
Liabilities and Stockholders’ Equity
Accounts Payable 250,000 166,000
Bonds Payable 120,000 150,000
Common Stock 1,000,000 630,000
Retained Earnings 250,000        180,000
Totals $1,620,000 $1,126,000

 

Instructions

(Provide the amount that should appear in the Consolidated Data column for each of the selected accounts. If the accounts should not appear in the Consolidated Data column, indicate “None”. Assume that all accounts have normal balances and that Speer Company stock was acquired for cash at a price equal to its book value.

 

 

COMPLETION STATEMENTS

 

  1. Debt investments are investments in government and _____________ bonds.

 

 

  1. Cost of debt investments includes the price paid plus ______________

 

 

  1. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has _______________ influence over the investee and therefore, the appropriate method of accounting for this type of investment is the _______________ method.

 

 

  1. Under the cost method, dividends received from an investee company are credited to the _______________ account, whereas under the equity method, dividends received from an investee company are credited to the _______________ account.

 

 

  1. At the beginning of the year, Price Corporation acquired 25% of Cooper Company common stock for $400,000. Cooper Company reported net income for the year of $85,000 and paid $25,000 cash dividends during the year. The balance of the Stock Investments account on the books of Price Corporation at the end of the year should be $___________.

 

 

  1. A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared.

 

 

  1. _______________ securities are bought and held primarily for sale in the near future.

 

 

  1. Fair Value Adjustment is a valuation _______________ account which is _______________ to (from) the cost of the investments.

 

 

  1. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an ______________ which is reported on the _________________.

 

 

 

  1. An unrealized loss on trading securities is reported under Other ____________________ on the income statement.

 

 

  1. An unrealized gain or loss on available-for-sale securities is reported as a separate component of _________________.

 

 

  1. Short-term investments are securities that are _____________ and ______________ to be converted into cash within the next year.

 

 

 

MATCHING

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Available-for-sale securities                         F.  Consolidated financial statements
  2. Subsidiary company                                    G.  Controlling interest
  3. Equity method                                             H.  Fair Value Adjustment
  4. Unrealized Gain or Loss—Equity                 I.  Parent company
  5. Fair value                                                       J.  Long-term investments

 

 

____    1.   Valuation allowance account.

 

____    2.   Amount for which a security could be sold.

 

____    3.   Ownership of more than 50% of another company’s common stock.

 

____    4.   Securities that may be sold in the future.

 

____    5.   Investments that are not readily marketable and not intended to be converted into cash within the next year.

 

____    6.   Financial statements that present the total assets and liabilities controlled by the parent and the total revenues and expenses of the subsidiary companies.

 

____    7.   The Stock Investments account is adjusted for net income and dividends received.

 

____    8.   A company that owns more than 50% of the common stock of another entity.

 

____    9.   Entity whose stock is owned by the parent company.

 

____  10.   An account that is reported in the stockholders’ equity section.

 

SHORT-ANSWER ESSAY QUESTIONS

 

S-A E 195

Distinguish between the cost and equity methods of accounting for investments in stocks.

 

 

S-A E 196

A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why all the individual items appearing on the separate balance sheets of each of the affiliated companies cannot be added together to arrive at a consolidated total for each item.

 

 

S-A E 197

What purposes are served by reporting Unrealized Gains (Losses)—Equity in the stockholders’ equity section?

 

S-A E 198

The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of.

 

 

S-A E 199

When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement?

 

 

S-A E 200   (Ethics)

Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Servitronics, a company specializing in automatic vending equipment.

 

The company decided not to sell its Servitronics stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished, so that less attention will be directed to it. (Presently, Greyhound has no long-term investment in stock at all.)

 

Required:

  1. Is it ethical for Greyhound to attempt to take over another company? Explain.
  2. Is it ethical for Greyhound to leave its investment in the short-term investment category? Explain.

 

 

S-A E 201      (Communication)

Sue Garner is the daughter of Fred Garner, the founder and president of Big Sky Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the stock prices of several of the firm’s available-for-sale securities are up, and that her father said that the company had made over $10,000 because of this jump in stock prices. She asks to see how the increase is recorded. It is a very busy time in the accounting department, and so her question is deferred.

 

Required:

Prepare a brief note to answer Sue’s question.

 

 

CHALLENGE EXERCISES

*CE 1

On January 2, 2015, Parr Company purchased 100% of the common stock of Sneed Company for $420,000. The fair value of Sneed Company’s assets and liabilities are equal to their book values except that land has a fair value of $120,000 and building have a fair value of $260,000.

 

Instructions

(a)     Complete the worksheet below for preparing a consolidated balance sheet. You may add accounts to the worksheet if necessary.

(b)    Prepare a consolidated balance sheet for Parr Company and Subsidiary on January 2, 2015.

 

 

PARR COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

Assets

Parr
Company

Sneed
Company

Eliminations

Consolidated      Data     

Debits

Credits

Current assets

$30,000

$40,000

Investment in Sneed common stock

420,000

Land

50,000

80,000

Buildings (net)

150,000

170,000

               

Totals

650,000

290,000

               

Liabilities and Stockholders’ Equity

Current liabilities

40,000

30,000

Common stock–Parr

370,000

Common stock–Sneed

200,000

Retained earnings–Parr

240,000

Retained earnings–Sneed

             

  60,000

            

            

              

Total

650,000

290,000

            

            

              

 

*CE 2

On January 2, 2015, Pine Company purchased 100% of the outstanding common shares of Seely Company for $520,000. Any excess of cost over the book value of the net assets of Seely Company should first be allocated to Land $55,000, and Buildings $40,000 and any remainder to goodwill.

Instructions

(a)     Complete the following worksheet below for preparing a consolidated balance sheet on the date of acquisition. You may add accounts to the worksheet that may be necessary.

(b)    Prepare a consolidated balance sheet for Pine Company and Subsidiary on January 2, 2015.

PINE COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)

Assets

Pine
Company

Seely
Company

Eliminations

Consolidated      Data     

Debits

Credits

Current assets

120,000

$70,000

Investment in Sneed common stock

520,000

Land

20,000

150,000

Buildings (net)

150,000

250,000

               

Totals

810,000

470,000

               

Liabilities and Stockholders’ Equity

Current liabilities

60,000

70,000

Common stock–Pine

500,000

Common stock–Seely

270,000

Retained earnings–Pine

250,000

Retained earnings–Seely

             

 130,000

            

            

              

Total

810,000

470,000

            

            

              

 

*CE 3

The separate balance sheets of Platt Company and its wholly owned subsidiary, Speer Company, as of the date of acquisition are shown below.

 

Assets        Platt              Speer         Consolidated      Data     
Cash $     170,000 $       57,000
Accounts Receivable 240,000 283,000
Inventory 100,000 300,000
Equipment (net) 300,000 486,000
Investment in Speer Co.        810,000                   
Totals $1,620,000 $1,126,000
Liabilities and Stockholders’ Equity
Accounts Payable 250,000 166,000
Bonds Payable 120,000 150,000
Common Stock 1,000,000 630,000
Equipment (net) 250,000        180,000
Totals $1,620,000 $1,126,000

 

Instructions

(Provide the amount that should appear in the Consolidated Data column for each of the selected accounts. If the accounts should not appear in the Consolidated Data column, indicate “None”. Assume that all accounts have normal balances and that Speer Company stock was acquired for cash at a price equal to its book value.

 

 

 

 

 

 

Chapter 13

 

STATEMENT OF CASH FLOWS

 

 

CHAPTER LEARNING OBJECTIVES

  1. Indicate the usefulness of the statement of cash flows.
  2. Distinguish among operating, investing, and financing activities.
  3. Prepare a statement of cash flows using the indirect method.
  4. Analyze the statement of cash flows.

a5.  Prepare a statement of cash flows using the direct method.

a6.  Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

a7.  Use the T-account approach to prepare a statement of cash flows.

 

TRUE-FALSE STATEMENTS

  1. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

 

 

  1. For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

 

 

  1. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

 

 

  1. A statement of cash flows indicates the sources and uses of cash during a period.

 

 

  1. A statement of cash flows should help investors and creditors assess the entity’s ability to generate future income.

 

 

  1. The information in a statement of cash flows helps investors and creditors assess the company’s ability to pay dividends and meet obligations.

 

 

  1. Financial statement readers can determine future investing and financing transactions by examining a company’s statement of cash flows.

 

 

  1. In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.

 

 

  1. Noncash investing and financing activities must be reported in the body of a statement of cash flows.

 

 

  1. The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

 

 

  1. The sale of land for cash would be classified as a cash inflow from an investing activity.

 

 

  1. Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.

 

 

  1. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

 

 

  1. The payment of interest on bonds payable is classified as a cash outflow from operating activities.

 

 

  1. Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.

 

 

 

  1. The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

 

 

  1. All major financing and investing activities affect cash.

 

 

  1. Cash provided by operations is generally equal to operating income.

 

 

  1. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

 

 

  1. Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

 

 

  1. A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.

 

 

  1. In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity.

 

 

  1. Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations.

 

 

  1. Free cash flow equals cash provided by operations less capital expenditures and cash dividends.

 

 

 

a25.     Operating expenses + an increase in prepaid expenses – a decrease in accrued expenses payable = cash payments for operating expenses.

 

 

 

a26.     During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $4,000; therefore, the cash paid for income taxes was $26,000.

 

 

a27.     In preparing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

 

 

a28.     During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers.

 

 

a29.     The use of a worksheet to prepare a statement of cash flows is optional.

 

 

a30.     The change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.

 

 

a31.     Analysis of the changes in all of the noncash balance sheet accounts will explain the change in the Cash account.

 

 

  1. The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities.

 

 

  1. Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed.

 

 

  1. Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash.

 

 

a35.      Under the direct method, the formula for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable.

 

 

 

a36.     The reconciling entry for depreciation expense in a worksheet is a credit to Accumulated Depreciation and a debit to Operating-Depreciation Expense.

 

MULTIPLE CHOICE QUESTIONS

  1. The statement of cash flows should help investors and creditors assess each of the following except the
  2. entity’s ability to generate future income.
  3. entity’s ability to pay dividends.
  4. reasons for the difference between net income and net cash provided by operating activities.
  5. cash investing and financing transactions during the period.

 

 

  1. The statement of cash flows
  2. must be prepared on a daily basis.
  3. summarizes the operating, financing, and investing activities of an entity.
  4. is another name for the income statement.
  5. is a special section of the income statement.

 

 

  1. Which one of the following items is not generally used in preparing a statement of cash flows?
  2. Adjusted trial balance
  3. Comparative balance sheets
  4. Current income statement
  5. Additional information

 

 

  1. The primary purpose of the statement of cash flows is to
  2. provide information about the investing and financing activities during a period.
  3. prove that revenues exceed expenses if there is a net income.
  4. provide information about the cash receipts and cash payments during a period.
  5. facilitate banking relationships.

 

 

  1. If a company reports a net loss, it
  2. may still have a net increase in cash.
  3. will not be able to pay cash dividends.
  4. will not be able to get a loan.
  5. will not be able to make capital expenditures.

 

 

  1. In addition to the three basic financial statements, which of the following is also a required financial statement?
  2. the “Cash Budget”
  3. the Statement of Cash Flows
  4. the Statement of Cash Inflows and Outflows
  5. the “Cash Reconciliation”

 

 

 

  1. The statement of cash flows will not report the
  2. amount of checks outstanding at the end of the period.
  3. sources of cash in the current period.
  4. uses of cash in the current period.
  5. change in the cash balance for the current period.

 

 

  1. The statement of cash flows reports each of the following except
  2. cash receipts from operating activities.
  3. cash payments from investing activities.
  4. the net change in cash.
  5. cash sales.

 

 

  1. Each of the following are particularly interested in the statement of cash flows except
  2. creditors.
  3. employees.
  4. shareholders.
  5. government agencies.

 

 

  1. Lending money and collecting the loans are
  2. operating activities.
  3. investing activities.
  4. financing activities.
  5. Non-cash investing and financing activities.

 

 

  1. The cash effects of transactions that create revenues and expenses are
  2. financing activities.
  3. investing activities.
  4. operating activities.
  5. processing activities.

 

 

  1. The acquisition of land by issuing common stock is
  2. a noncash transaction which is not reported in the body of a statement of cash flows.
  3. a cash transaction and would be reported in the body of a statement of cash flows.
  4. a noncash transaction and would be reported in the body of a statement of cash flows.
  5. only reported if the statement of cash flows is prepared using the direct method.

 

 

  1. The order of presentation of activities on the statement of cash flows is
  2. operating, investing, and financing.
  3. operating, financing, and investing.
  4. financing, operating, and investing.
  5. financing, investing, and operating.

 

 

 

  1. Financing activities involve
  2. lending money.
  3. acquiring investments.
  4. issuing debt.
  5. acquiring long-lived assets.

 

 

  1. Investing activities include
  2. collecting cash on loans made.
  3. obtaining cash from creditors.
  4. obtaining capital from owners.
  5. repaying money previously borrowed.

 

 

  1. Generally, the most important category on the statement of cash flows is cash flows from
  2. operating activities.
  3. investing activities.
  4. financing activities.
  5. significant noncash activities.

 

 

  1. The category that is generally considered to be the best measure of a company’s ability to continue as a going concern is
  2. cash flows from operating activities.
  3. cash flows from investing activities.
  4. cash flows from financing activities.
  5. usually different from year to year.

 

 

  1. Cash receipts from interest and dividends are classified as
  2. financing activities.
  3. investing activities.
  4. operating activities.
  5. either financing or investing activities.

 

 

  1. Each of the following is an example of a significant noncash activity except
  2. conversion of bonds into common stock.
  3. exchanges of plant assets.
  4. issuance of debt to purchase assets.
  5. stock dividends.

 

 

  1. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the
  2. two cash effects can be netted and presented as one item in the investing activities section.
  3. cash inflow and cash outflow should be reported separately in the investing activities section.
  4. two cash effects can be netted and presented as one item in the financing activities section.
  5. cash inflow and cash outflow should be reported separately in the financing activities section.

 

  1. Of the items below, the one that appears first on the statement of cash flows is
  2. noncash investing and financing activities.
  3. net increase (decrease) in cash.
  4. cash at the end of the period.
  5. cash at the beginning of the period.

 

 

  1. Which of the following transactions does not affect cash during a period?
  2. Write-off of an uncollectible account
  3. Collection of an accounts receivable
  4. Sale of treasury stock
  5. Exercise of the call option on bonds payable

 

 

  1. Significant noncash transactions would not include
  2. conversion of bonds into common stock.
  3. asset acquisition through bond issuance.
  4. treasury stock acquisition.
  5. exchange of plant assets.

 

 

  1. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in
  2. the financing section.
  3. the “extraordinary” section.
  4. a separate schedule or note to the financial statements.
  5. the stockholders’ equity section.

 

 

  1. Indicate where the payment of income taxes would appear, if at all, on the statement of cash flows.
  2. Operating activities section
  3. Investing activities section
  4. Financing activities section
  5. Does not represent a cash flow

 

 

  1. Indicate where the issuance of common stock issued for cash would appear, if at all, on the indirect statement of cash flows.
  2. Operating activities section
  3. Investing activities section
  4. Financing activities section
  5. Does not represent a cash flow

 

 

  1. Indicate where the purchase of land for cash would appear, if at all, on the indirect statement of cash flows.
  2. Operating activities section
  3. Investing activities section
  4. Financing activities section
  5. Does not represent a cash flow

 

 

  1. Indicate where the event purchase of land and a building with a mortgage would appear, if at all, on the indirect statement of cash flows.
  2. Operating activities section
  3. Investing activities section
  4. Financing activities section
  5. Does not represent a cash flow

 

 

  1. Jean’s Vegetable Market had the following transactions during 2014:
  2. Issued $50,000 of par value common stock for cash.
  3. Repaid a 6 year note payable in the amount of $22,000.
  4. Acquired land by issuing common stock of par value $50,000.
  5. Declared and paid a cash dividend of $7,000.
  6. Sold a long-term investment (cost $3,000) for cash of $6,000.
  7. Acquired an investment in IBM stock for cash of $10,000.

What is the net cash provided by financing activities?

  1. $21,000
  2. $67,000
  3. $28,000
  4. $0

 

 

 

  1. Jean’s Vegetable Market had the following transactions during 2014:
  2. Issued $50,000 of par value common stock for cash.
  3. Repaid a 6 year note payable in the amount of $22,000.
  4. Acquired land by issuing common stock of par value $100,000.
  5. Declared and paid a cash dividend of $2,000.
  6. Sold a long-term investment (cost $3,000) for cash of $8,000.
  7. Acquired an investment in IBM stock for cash of $15,000.

What is the net cash provided (used) by investing activities?

  1. $15,000
  2. $33,000
  3. ($7,000)
  4. $8,000

 

 

  1. Vision Company purchased treasury stock with a cost of $16,000 during 2014. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $860,000. Cash flows from financing activities for 2014 total
  2. $840,000 net cash inflow.
  3. $856,000 net cash inflow.
  4. $860,000 net cash outflow.
  5. $824,000 net cash inflow.

 

 

 

 

  1. Kanet Company issued common stock for proceeds of $386,000 during 2014. The company paid dividends of $80,000 and issued a long-term note payable for $95,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $15,000. The financing section of the statement of cash flows will report net cash inflows of
  2. $291,000.
  3. $481,000.
  4. $306,000.
  5. $371,000.

 

 

 

  1. In Jude Company, land decreased $150,000 because of a cash sale for $150,000, the equipment account increased $60,000 as a result of a cash purchase, and Bonds Payable increased $120,000 from issuance for cash at face value. The net cash provided by investing activities is
  2. $150,000.
  3. $210,000.
  4. $90,000.
  5. $270,000.

 

 

 

  1. Accounts receivable arising from sales to customers amounted to $86,000 and $77,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $290,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is
  2. $290,000.
  3. $299,000.
  4. $213,000.
  5. $280,000.

 

 

 

  1. Accounts receivable arising from sales to customers amounted to $40,000 and $55,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $180,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is
    1. $180,000.
    2. $195,000.
    3. $220,000.
    4. $165,000.

 

 

 

 

  1. Bush Company reported net income of $60,000 for the year. During the year, accounts receivable decreased by $8,000, accounts payable increased by $4,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is
  2. $48,000.
  3. $77,000.
  4. $59,000.
  5. $55,000.

 

 

 

  1. Adama Company reported a net loss of $6,000 for the year ended December 31, 2014. During the year, accounts receivable increased $15,000, merchandise inventory decreased $12,000, accounts payable decreased by $20,000, and depreciation expense of $12,000 was recorded. During 2014, operating activities
  2. used net cash of $17,000.
  3. used net cash of $29,000.
  4. provided net cash of $24,000.
  5. provided net cash of $21,000.

 

 

 

  1. The net income reported on the income statement for the current year was $220,000. Depreciation recorded on plant assets was $35,000. Accounts receivable and inventories increased by $2,000 and $8,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $12,000 respectively. How much cash was provided by operating activities?
  2. $200,000
  3. $235,000
  4. $220,000
  5. $255,000

 

 

 

  1. The net income reported on the income statement for the current year was $245,000. Depreciation was $40,000. Account receivable and inventories decreased by $12,000 and $35,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities?
  2. $296,000
  3. $339,000
  4. $323,000
  5. $311,000

 

 

 

 

  1. If a gain of $12,000 is incurred in selling (for cash) office equipment having a book value of $110,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is
  2. $98,000.
  3. $122,000.
  4. $110,000.
  5. $12,000.

 

 

 

  1. If a loss of $25,000 is incurred in selling (for cash) office equipment having a book value of $90,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is
  2. $65,000.
  3. $90,000.
  4. $115,000.
  5. $25,000.

 

 

 

  1. Wilson Company reported net income of $105,000 for the year ended December 31, 2014. During the year, inventories decreased by $15,000, accounts payable decreased by $20,000, depreciation expense was $18,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2014 using the indirect method was
  2. $101,000.
  3. $109,000.
  4. $120,000.
  5. $118,000.

 

 

 

  1. The third (final) step in preparing the statement of cash flows is to
  2. analyze changes in noncurrent asset and liability accounts.
  3. compare the net change in cash with the change in the cash account reported on the balance sheet.
  4. determine net cash provided by operating activities.
  5. list the noncash activities.

 

 

  1. Which one of the following items is not necessary in preparing a statement of cash flows?
  2. Determine the change in cash
  3. Determine the cash provided by operations
  4. Determine cash from financing and investing activities
  5. Determine the cash in all bank accounts

 

 

 

  1. If accounts receivable have increased during the period,
  2. revenues on an accrual basis are less than revenues on a cash basis.
  3. revenues on an accrual basis are greater than revenues on a cash basis.
  4. revenues on an accrual basis are the same as revenues on a cash basis.
  5. expenses on an accrual basis are greater than expenses on a cash basis.

 

 

  1. If accounts payable have increased during a period,
  2. revenues on an accrual basis are less than revenues on a cash basis.
  3. expenses on an accrual basis are less than expenses on a cash basis.
  4. expenses on an accrual basis are greater than expenses on a cash basis.
  5. expenses on an accrual basis are the same as expenses on a cash basis.

 

 

  1. Which one of the following affects cash during a period?
  2. Recording depreciation expense
  3. Declaration of a cash dividend
  4. Write-off of an uncollectible account receivable
  5. Payment of an accounts payable

 

 

  1. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is
  2. added to net income.
  3. deducted from net income.
  4. ignored because it does not affect cash.
  5. not reported on a statement of cash flows.

 

 

  1. Rubble Company reported net income of $70,000 for the year. During the year, accounts receivable increased by $6,000, accounts payable decreased by $5,000 and depreciation expense of $8,000 was recorded. Net cash provided by operating activities for the year is
  2. $67,000.
  3. $89,000.
  4. $63,000.
  5. $70,000.

 

 

 

  1. Pare Company reported a net loss of $30,000 for the year ended December 31, 2014. During the year, accounts receivable decreased $15,000, merchandise inventory increased $25,000, accounts payable increased by $30,000, and depreciation expense of $20,000 was recorded. During 2014, operating activities
  2. used net cash of $10,000.
  3. used net cash of $25,000.
  4. provided net cash of $10,000.
  5. provided net cash of $25,000.

 

 

 

  1. Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the
  2. direct method.
  3. indirect method.
  4. working capital method.
  5. cost-benefit method.

 

 

  1. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is
  2. deducted from net income.
  3. added to net income.
  4. ignored because it does not affect income.
  5. ignored because it does not affect expenses.

 

 

  1. Using the indirect method, patent amortization expense for the period
  2. is deducted from net income.
  3. causes cash to increase.
  4. causes cash to decrease.
  5. is added to net income.

 

 

  1. In developing the cash flows from operating activities, most companies in the U. S.
  2. use the direct method.
  3. use the indirect method.
  4. present both the indirect and direct methods in their financial reports.
  5. prepare the operating activities section on the accrual basis.

 

 

  1. Each of the following is added to net income in computing net cash provided by operating activities except
  2. amortization expense.
  3. an increase in accrued expenses payable.
  4. a gain on sale of equipment.
  5. a decrease in inventory.

 

 

  1. Which of the following would be subtracted from net income using the indirect method?
  2. Depreciation expense
  3. An increase in accounts receivable
  4. An increase in accounts payable
  5. A decrease in prepaid expenses

 

 

  1. Which of the following would be added to net income using the indirect method?
  2. An increase in accounts receivable
  3. An increase in prepaid expenses
  4. Depreciation expense
  5. A decrease in accounts payable

 

 

  1. Which of the following would not be an adjustment to net income using the indirect method?
  2. Depreciation Expense
  3. An increase in Prepaid Insurance
  4. Amortization Expense
  5. An increase in Land

 

 

  1. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n)
  2. subtraction from net income.
  3. addition to net income.
  4. addition to cash flow from investing activities.
  5. subtraction from cash flow from investing activities.

 

 

  1. Which of the following adjustments to convert net income to net cash provided by operating activities is correct?

Add to Net Income        Deduct from Net Income

  1. Accounts Receivable increase                               decrease
  2. Prepaid Expenses increase                               decrease
  3. Inventory decrease                              increase
  4. Taxes Payable decrease                              increase

 

 

  1. Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect?

Add to Net Income        Deduct from Net Income

  1. Accounts Receivable decrease                           increase
  2. Prepaid Expenses increase                            decrease
  3. Inventory decrease                           increase
  4. Accounts Payable increase                            decrease

 

 

  1. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income?
  2. Gain on Sale of Equipment
  3. Depreciation Expense
  4. Patent Amortization Expense
  5. Depletion Expense

 

 

  1. Using the indirect method, if equipment is sold at a gain, the
  2. sale proceeds received are deducted in the operating activities section.
  3. sale proceeds received are added in the operating activities section.
  4. amount of the gain is added in the operating activities section.
  5. amount of the gain is deducted in the operating activities section.

 

 

 

  1. A company had net income of $210,000. Depreciation expense is $27,000. During the year, Accounts Receivable and Inventory increased $17,000 and $42,000, respectively. Prepaid Expenses and Accounts Payable decreased $5,000 and $6,000, respectively. There was also a loss on the sale of equipment of $2,000. How much cash was provided by operating activities?
  2. $175,000
  3. $179,000
  4. $241,000
  5. $271,000

 

 

 

  1. On the statement of cash flows using the indirect method, patent amortization expense will
  2. be added to net income in the operating section.
  3. be deducted from net income in the operating section.
  4. appear as an inflow of cash in the investing section.
  5. appear as an outflow of cash in the investing section.

 

 

  1. The indirect and direct methods of preparing the statement of cash flows are identical except for the
  2. significant noncash activity section.
  3. operating activities section.
  4. investing activities section.
  5. financing activities section.

 

 

  1. Land acquired from the issuance of common stock is reported
  2. as a financing activity.
  3. as an investing activity.
  4. as an operating activity.
  5. in a separate schedule at the bottom of the statement of cash flows.

 

 

  1. In Ramon Company, Treasury Stock increased $20,000 from a cash purchase, and Retained Earnings increased $80,000 as a result of net income of $120,000 and cash dividends paid of $40,000. Net cash used by financing activities is:
  2. $20,000.
  3. $40,000.
  4. $120,000.
  5. $60,000.

 

 

 

 

  1. In Alona Company, net income is $285,000. If accounts receivable increased $140,000 and accounts payable decreased $40,000, net cash provided by operating activities using the indirect method is:
  2. $105,000.
  3. $185,000.
  4. $385,000.
  5. $465,000.

 

 

 

  1. In Lynne Company, there was an increase in the land account during the year of $43,000. Analysis reveals that the change resulted from a cash sale of land at cost $115,000, and a cash purchase of land for $158,000. In the statement of cash flows, the change in the land account should be reported in the investment section:
  2. as a net purchase of land, $43,000.
  3. only as a purchase of land $158,000.
  4. as a purchase of land $158,000 and a sale of land $115,000.
  5. only as a sale of land $115,000.

 

 

  1. The following data are available for Sampson Corporation.

Net income                                                      $200,000

Depreciation expense                                          60,000

Dividends paid                                                    90,000

Loss on sale of land                                             15,000

Decrease in accounts receivable                           30,000

Decrease in accounts payable                              45,000

Net cash provided by operating activities is:

  1. $140,000.
  2. $260,000.
  3. $160,000.
  4. $240,000.

 

 

 

  1. The following data are available for Alamo Corporation.

Sale of land                                                      $225,000

Sale of equipment                                            $130,000

Issuance of common stock                                140,000

Purchase of equipment                                        70,000

Payment of cash dividends                               120,000

 

Net cash provided by investing activities is:

  1. $285,000.
  2. $260,000.
  3. $305,000.
  4. $425,000.

 

 

 

  1. The following data are available for Two-off Company.

Increase in accounts payable                           $120,000

Increase in bonds payable                                 300,000

Sale of investments                                            150,000

Issuance of common stock                                160,000

Payment of cash dividends                                  90,000

 

Net cash provided by financing activities is:

  1. $180,000.
  2. $370,000.
  3. $360,000.
  4. $420,000.

 

 

 

  1. If $250,000 of bonds are issued during the year but $130,000 of old bonds are retired during the year, the statement of cash flows will show a(n)
  2. net increase in cash of $120,000.
  3. net decrease in cash of $120,000.
  4. increase in cash of $250,000 and a decrease in cash of $130,000.
  5. net gain on retirement of bonds of $120,000.

 

 

  1. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows?
  2. Declaration and payment of a cash dividend during the period.
  3. Net income for the period.
  4. 1
  5. 2
  6. Neither 1 nor 2.
  7. Both 1 and 2.

 

 

  1. The statement of cash flows
  2. is prepared instead of an income statement under generally accepted accounting principles.
  3. is used to assess an entity’s ability to pay dividends and meet obligations.
  4. is prepared from comparative income statements.
  5. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.

 

 

  1. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of
  2. the adjusted trial balance.
  3. the current period’s balance sheet.
  4. a comparative balance sheet.
  5. a comparative income statement.

 

 

  1. To determine the net cash provided (used) by operating activities, it is necessary to analyze
  2. the current year’s income statement.
  3. a comparative balance sheet.
  4. additional information.
  5. All of these answers are correct.

 

 

  1. Which of the following would not be needed to determine net cash provided by operating activities?
  2. Depreciation expense
  3. Change in accounts receivable
  4. Payment of cash dividends
  5. Change in prepaid expenses

 

 

  1. When equipment is sold for cash, the amount received is reflected as a cash
  2. inflow in the operating section.
  3. inflow in the financing section.
  4. inflow in the investing section.
  5. outflow in the operating section.

 

 

  1. The statement of cash flows will not provide insight into
  2. why dividends were not increased.
  3. whether cash flow is greater than net income.
  4. the exact proceeds of a future bond issue.
  5. how the retirement of debt was accomplished.

 

 

  1. Which of the following transactions would not be classified as a financing activity?
  2. Purchase of treasury stock
  3. Payment of dividends
  4. Issuance of bonds at a discount
  5. Purchase of a long-term investment in bonds

 

 

  1. A measure that describes the cash remaining from operations after adjustment for capital expenditures and dividends is
  2. adjusted cash from operations.
  3. cash provided by operations.
  4. free cash flow.
  5. net cash provided by operating activities.

 

 

  1. Free cash flow equals cash provided by
  2. operations less capital expenditures and cash dividends.
  3. operations less cash dividends.
  4. investing activities less capital expenditures and cash dividends.
  5. operations less capital expenditures.

 

 

 

  1. Tomas Pest Control Products has the following information available:

Net Income                                             $25,000

Cash Provided by Operations                  33,000

Cash Sales                                                 65,000

Capital Expenditures                                10,000

Dividends Paid                                           2,000

What is Tomas’ free cash flow?

  1. $27,000
  2. $23,000
  3. $21,000
  4. $10,000

 

 

 

  1. During 2014, Harvey Industries reported cash provided by operations of $670,000, cash used in investing of $1,039,000, and cash used in financing of $145,000. In addition, cash spent for fixed assets during the period was $404,000. No dividends were paid. Based on this information, what was Harvey’s free cash flow?
  2. ($369,000)
  3. $1,450,000
  4. $266,000
  5. ($918,000)

 

 

 

  1. All of the following statements about free cash flow are false except:
  2. Significant free cash flow indicates less potential to finance new investments.
  3. Free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends.
  4. Free cash flow is not reported on the statement of cash flows.
  5. Significant free cash flow indicates less potential to pay additional dividends.

 

 

 

a124.    The cost of goods sold during the year was $183,000. Merchandise inventory decreased by $8,000 during the year and accounts payable decreased by $4,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for       merchandise total

  1. $187,000.
  2. $179,000.
  3. $171,000.
  4. $195,000.

 

 

 

 

a125.    Gonzo Company reports a $25,000 increase in inventory and a $12,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $185,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were

  1. $185,000.
  2. $197,000.
  3. $222,000.
  4. $148,000.

 

 

 

a126.    During 2015, Zuma Company had $150,000 in cash sales and $1,240,000 in credit sales. The accounts receivable balances were $180,000 and $215,000 at December 31, 2014 and 2015, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2015?

  1. $1,205,000
  2. $1,425,000
  3. $1,390,000
  4. $1,355,000

 

 

 

a127.    Lager Company has other operating expenses of $260,000. There has been an increase in prepaid expenses of $20,000 during the year, and accrued liabilities are $15,000 lower than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Lager’s cash payments for operating expenses?

  1. $255,000
  2. $265,000
  3. $225,000
  4. $295,000

 

 

 

  1. In the Papyrus Corporation, cash receipts from customers were $136,000, cash payments for operating expenses were $102,000, and one-third of the company’s $9,300 income taxes were paid during the year. Net cash provided by operating activities is:
  2. $34,000.
  3. $24,700.
  4. $30,900.
  5. $27,800.

 

 

 

a 129.    Each of the following would be reported under operating activities except cash receipts

  1. from sales of goods.
  2. from sales of investments.
  3. of interest on loans.
  4. of dividends from investments.

 

 

a 130.    Which of the following statements concerning the statement of cash flows is true?

  1. The statement of cash flows is usually more accurate when using the indirect method.
  2. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided.
  3. The statement of cash flows reflects both earnings per share and cash per share.
  4. The statement of cash flows is an optional financial statement for external reporting purposes.

 

 

a131.    Squeeze Company reports the following:

End of Year             Beginning of Year

Inventory                         $25,000                       $42,000

Accounts Payable              22,000                         12,000

If cost of goods sold for the year is $220,000, the amount of cash paid to suppliers is

  1. $227,000.
  2. $205,000.
  3. $193,000.
  4. $247,000.

 

 

 

a132.    During the year, Salaries Payable decreased by $5,000. If Salary Expense amounted to $174,000 for the year, the cash paid to employees (including deductions from gross pay) is

  1. $179,000.
  2. $174,000.
  3. $169,000.
  4. $184,000.

 

 

 

a133.    Ale Company reports a $16,000 increase in inventory and a $8,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $150,000. The cash payments made to suppliers were

  1. $150,000.
  2. $158,000.
  3. $126,000.
  4. $174,000.

 

 

 

a134.    LRRP Company had credit sales of $650,000. The beginning accounts receivable balance was $15,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period?

  1. $775,000
  2. $650,000
  3. $525,000
  4. $665,000

 

 

a135.    Marke Inc. had cash sales of $400,000 and credit sales of $1,150,000. The accounts receivable balance increased $30,000 during the year. How much cash did Marke receive from its customers during the year?

  1. $1,520,000
  2. $1,120,000
  3. $1,550,000
  4. $780,000

 

 

 

a136.    Ware Company had purchases of $260,000. The comparative balance sheet analysis revealed a $15,000 decrease in inventory and a $25,000 increase in accounts payable. What were Ware’s cash payments to suppliers?

  1. $235,000
  2. $220,000
  3. $275,000
  4. $300,000

 

 

 

a137.    Christine Company had an increase in inventory of $55,000. The cost of goods sold was $95,000. There was a $6,000 decrease in accounts payable from the prior period. What were Christine’s cash payments to suppliers?

  1. $156,000
  2. $61,000
  3. $144,000
  4. $101,000

 

 

 

a138.    Which of the following items does not appear in the statement of cash flows under the direct method?

  1. Cash payments to suppliers
  2. Cash collections from customers
  3. Depreciation Expense
  4. Cash from the sale of equipment

 

 

a139.    Ale Company has other operating expenses of $80,000. There has been a decrease in prepaid expenses of $6,000 during the year, and accrued liabilities are $5,000 larger than in the prior period. What were Ale’s cash payments for operating expenses?

  1. $81,000
  2. $82,000
  3. $69,000
  4. $80,000

 

 

 

a140.    Beane Corporation shows income tax expense of $82,000. There has been a $6,000 decrease in federal income taxes payable and a $7,000 increase in state income taxes payable during the year. What was Beane’s cash payment for income taxes?

  1. $82,000
  2. $81,000
  3. $76,000
  4. $95,000

 

 

 

a141.    Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method?

  1. Cash receipts from customers
  2. Cash paid for income taxes
  3. Gain on sale of equipment
  4. Cash paid to employees

 

 

 

a142.    In the Garnet Company, the beginning and ending balances in Land were $198,000 and $240,000 respectively. During the year, land costing $50,000 was sold for $50,000 cash, and land costing $92,000 was purchased for cash. The entries in the reconciling columns of the worksheet will include a:

  1. credit to Land $50,000 and a debit to Sale of Land $50,000 under investing activities.
  2. debit to Land $92,000 and a credit to Purchase of Land $92,000 under financing activities.
  3. net debit to Land $42,000 and a credit to Purchase of Land $42,000 under investing activities.
  4. credit to Land $50,000 and a debit to Sale of Land $50,000 under financing activities.

 

 

a143.    When listing accounts in the statement of cash flows worksheet, the accumulated depreciation account is shown

  1. with accounts that have credit balances.
  2. with accounts that have debit balances.
  3. as a credit under the reconciling items.
  4. as a debit under the reconciling items.

 

 

a144.    In the bottom portion of the statement of cash flows worksheet,

  1. inflows of cash are debits in the reconciling columns.
  2. outflows of cash are debits in the reconciling columns.
  3. information pertaining to investing and financing activities only is entered.
  4. only significant noncash transactions are entered.

 

 

 

a145.    On the statement of cash flows worksheet,

  1. significant noncash investing and financing activities are not entered in the reconciling columns.
  2. a decrease in cash will be offset by a debit in the reconciling items columns at the bottom of the worksheet.
  3. an increase in cash will be offset by a debit in the reconciling items column at the bottom of the worksheet.
  4. income statement accounts are listed after balance sheet accounts in the top half of the worksheet under the indirect method.

 

 

 

  1. Which of the following steps is not required in preparing the statement of cash flows?
  2. Determine the net change in cash.
  3. Determine the net cash provided by operating activities.
  4. Determine cash from investing and financing activities.
  5. Determine the change in current assets.

 

 

 

  1. Financing activities involve
  2. lending money to other entities and collecting on those loans.
  3. cash receipts from sales of goods and services.
  4. acquiring and disposing of productive long-lived assets.
  5. long-term liability and stockholders’ equity items.

 

 

 

  1. The information to prepare the statement of cash flows usually comes from each of the following except
  2. the comparative balance sheet.
  3. the prior year’s income statement.
  4. additional information.
  5. the current income statement.

 

 

 

  1. The statement of cash flows is prepared from all of the following except
  2. the adjusted trial balance.
  3. comparative balance sheets.
  4. selected transaction data.
  5. the current income statement.

 

 

 

  1. The information in a statement of cash flows will not help investors to assess the entity’s ability to
  2. generate future cash flows.
  3. obtain favorable borrowing terms at a bank.
  4. pay dividends.
  5. pay its obligations when they become due.

 

 

  1. In converting net income to net cash provided by operating activities, under the indirect method:
  2. decreases in accounts receivable and increases in prepaid expenses are added.
  3. decreases in inventory and increases in accrued liabilities are added.
  4. decreases in accounts payable and decreases in inventory are deducted.
  5. increases in accounts receivable and increases in accrued liabilities are deducted.

 

 

  1. In the Buans Company, land decreased $80,000 because of a cash sale for $80,000, the equipment account increased $35,000 as a result of a cash purchase, and Bonds Payable increased $60,000 from an issuance for cash at face value. The net cash provided by investing activities is
  2. $80,000.
  3. $165,000.
  4. $45,000.
  5. $25,000.

 

 

 

a153.    Hogan Company uses the direct method in determining net cash provided by operating activities, During the year, operating expenses were $295,000, prepaid expenses increased $23,000, and accrued expenses payable increased $33,000. Cash payments for operating expenses were

  1. $39,000.
  2. $51,000.
  3. $305,000.
  4. $285,000.

 

 

 

a 154.    Spa Company uses the direct method in determining net cash provided by operating activities. The income statement shows income tax expense $85,000. Income taxes payable were $35,000 at the beginning of the year and $20,000 at the end of the year. Cash payments for income taxes are

  1. $70,000.
  2. $85,000.
  3. $100,000.
  4. $140,000.

 

 

 

a155.    When a worksheet is used, all but one of the following statements is correct. The incorrect statement is

  1. Reconciling items on the worksheet are not journalized or posted.
  2. The bottom portion of the worksheet shows the statement of cash flows effects.
  3. The balance sheet accounts portion of the worksheet is divided into two parts: assets, and liabilities and stockholders’ equity.
  4. Each line pertaining to a balance sheet account should foot across.

 

 

 

  1. Under IFRS, the cash flow statement can be prepared using
  2. the direct method only.
  3. the indirect method only.
  4. either the direct or indirect method.
  5. the T-account method only.

 

 

  1. Under IFRS, bank overdrafts are classified as
  2. operating activities.
  3. investing activities.
  4. financing activities.
  5. cash and cash equivalents.

 

 

  1. Which of the following activities is excluded from the statement of cash flows under IFRS?
  2. Financing activities
  3. Investing activities
  4. Noncash investing and financing activities
  5. Operating activities

 

 

  1. Each of the following items may be classified as operating or financing activities under IFRS except
  2. dividends paid.
  3. dividends received.
  4. interest paid.
  5. All of these answers are correct.

 

 

  1. Under IFRS, some companies present which section of the cash flow statement as a single line item?
  2. Operating activities
  3. Investing activities
  4. Financing activities
  5. Noncash investing and financing activities

 

 


 

BRIEF EXERCISES

BE 161

Selected transactions for the Ecker Company are listed below.

  1. Collected accounts receivable.
  2. Declared and paid dividends on common stock.
  3. Sold long-term investments for cash.
  4. Issued stock for equipment.
  5. Repaid five year note payable.
  6. Paid employee wages.
  7. Converted bonds payable to common stock.
  8. Acquired long-term investment with cash.
  9. Sold buildings and equipment for cash.
  10. Sold merchandise to customers.

 

Instructions

Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

 

 

BE 162

Garton Company had net income of $195,000 in 2014. Depreciation expense for the year is $50,000. During the year, Accounts Receivable increased $8,000 and Prepaid Expenses decreased $1,000. The company also sold equipment at a loss of $3,000.

 

Instructions

Calculate net cash flows from operating activities using the indirect method.

 

 

BE 163

During 2014, Blaine Company sold a building with a book value of $145,000 for proceeds of $175,000. The company also sold long-term investments for proceeds of $32,000. The company purchased land and a new building for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2014.

 

Instructions

Compute net cash flows from investing activities.

 

 

 

BE 164

Madisun Company issued common stock for proceeds of $20,000 during 2014. The company paid dividends of $5,000. The company also issued a long-term note payable for $35,000 in exchange for equipment during the year. The company sold treasury stock that had a cost of $3,000 for $9,000.

 

Instructions

Compute net cash flows from financing activities.

 

 

BE 165

At January 1, 2014, Benny Enterprises reported a balance in the Equipment account of $45,000. During the year the company purchased equipment with a cost of $60,000 and sold equipment with a book value of $30,000. The company reported a loss on the sale of equipment of $4,000. Assume the indirect method is used.

 

Instructions

Determine what amount will be reported in (a) the operating activities section and (b) the investing activities section with regard to the purchase and sale of equipment.

 

 

 

BE 166

Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters.

Code

Cash Flows From Operating Activities

Add to Net Income                                                    A

Deduct from Net Income                                           D

 

  1. Increase in accounts receivable
  2. Increase in inventory
  3. Decrease in prepaid expenses
  4. Decrease in accounts payable
  5. Increase in accrued liabilities
  6. Increase in income taxes payable
  7. Depreciation expense
  8. Loss on sale of investment
  9. Gain on disposal of equipment
  10. Amortization expense

 

 


BE 167

Doctor Company prepared the tabulation below at December 31, 2015.

 

Net Income………………………………………………………………………………………………….       $307,000

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation expense, $32,000……………………………………………………………….       _______

 

Decrease in accounts receivable, $50,000…………………………………………………       _______

 

Increase in inventory, $12,000……………………………………………………………….       _______

 

Decrease in accounts payable, $8,600……………………………………………………..       _______

 

Increase in income taxes payable, $1,500…………………………………………………       _______

 

Loss on sale of land, $5,000…………………………………………………………………..       _______

 

Net cash provided (used) by operating activities………………………………………       _______

 

Instructions

Show how each item should be reported in the statement of cash flows. Use parentheses for deductions.

 

 

BE 168

Hogan Enterprises reported cash flow from operations of $275,000. The company made capital expenditures of $110,000 and paid dividends of $35,000.

 

Instructions

Compute free cash flow.

 

 

 

aBE 169

Small Company reported cost of goods sold of $179,000 on its 2014 income statement. The company’s beginning inventory was $35,000. The ending inventory was valued at $40,000. The Accounts Payable balance at January 1 was $25,000. The December 31 balance in Accounts Payable was $22,000.

 

Instructions

Compute cash payments to suppliers.

 

 

 

aBE 170

Show Company had total operating expenses of $153,000 in 2014, which included Depreciation Expense of $30,000. Also during 2014, prepaid expenses decreased by $9,500 and accrued expenses increased by $8,500.

 

Instructions

Calculate the amount of cash payments for operating expenses in 2014 using the direct method.

 

 

 

EXERCISES

Ex. 171

Classify each of the following as a(n):

  1. Operating Activity
  2. Investing Activity
  3. Financing Activity

 

_____  1    Issuance of bonds.

_____  2.   Sale of equipment.

_____  3.   Amortization expense.

_____  4.   Purchase of treasury stock.

_____  5.   Receipt of dividends on investment.

_____  6.   Purchase of land.

 

 

Ex. 172

Selected transactions of Alton Company are listed below.

  1. Common stock is sold for cash above par value.
  2. Bonds payable are issued for cash at a discount.
  3. Interest receivable on a short-term note receivable is collected.
  4. Land is sold for cash at book value.
  5. Accounts payable are paid in cash.
  6. Equipment is purchased by signing a 3-year, 10% note payable.
  7. Cash dividends on common stock are declared and paid.
  8. 100 shares of XYZ common stock are purchased for cash.
  9. Merchandise is sold to customers for cash.
  10. Bonds payable are converted into common stock.

 

Instructions

Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

 

 

Ex. 173

(a)   Identify several alternatives for presenting significant noncash activities in financial statements.

(b)   Give three examples of significant noncash transactions.

 

 

Ex. 174

The following information is available for Redcands Company:

Receipts from customers                                          $215,000

Dividends from stock investments                                 3,000

Proceeds from sale of equipment                                  18,000

Proceeds from issuance of stock                                   90,000

Payments for inventory                                              100,000

Payments for operating expenses                                 78,000

Interest paid                                                                    6,000

Taxes paid                                                                       4,000

Dividends paid                                                              20,000

 

Instructions

Based on the preceding information, compute the net cash provided by operating activities.

 

Ex. 175

Plough Company reported net income of $180,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year                 Beginning of Year

Cash                                                      $20,000                             $15,000

Accounts receivable                                24,000                               32,000

Inventories                                              50,000                               65,000

Prepaid expenses                                      9,500                                 5,000

Accounts payable                                   12,000                               18,000

Income taxes payable                                1,600                                 1,200

 

Instructions

Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method.

 

 

Ex. 176

Plexis Company reported net income of $148,000. For 2014, depreciation was $45,000, and the company reported a gain on sale of investments of $12,000. Accounts receivable increased $25,000 and accounts payable decreased $23,000.

Instructions

Compute net cash provided by operating activities using the indirect method.

 

 

Ex. 177

Assuming a statement of cash flows is prepared, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows.

Code

Cash Flows From Operating Activities

Add to Net Income                                        A

Deduct from Net Income                               D

Cash Flows From Investing Activities                IA

Cash Flows From Financing Activities               FA

Category

  1. Common stock is issued for cash at an amount above par value.                   ______
  2. Merchandise inventory increased during the period.                                      ______
  3. Depreciation expense recorded for the period.                                               ______
  4. Building was purchased for cash.                                                                   ______
  5. Bonds payable were acquired and retired at their carrying value.                  ______
  6. Accounts payable decreased during the period.                                             ______
  7. Prepaid expenses decreased during the period.                                               ______
  8. Treasury stock was acquired for cash.                                                           ______
  9. Land is sold for cash at an amount equal to book value.                                ______
  10. Patent amortization expense recorded for a period.                                       ______

 

Ex. 178

A comparative balance sheet for Rocker Company appears below:

ROCKER COMPANY

Comparative Balance Sheet

Dec. 31, 2015              Dec. 31, 2014

Assets

Cash                                                                                           $ 34,000                       $11,000

Accounts receivable                                                                       18,000                         13,000

Inventory                                                                                       25,000                         17,000

Prepaid expenses                                                                             6,000                           9,000

Long-term investments                                                                     -0-                            17,000

Equipment                                                                                     60,000                         33,000

Accumulated depreciation—equipment                                     (20,000)                      (15,000)

Total assets                                                                       $123,000                       $85,000

 

Liabilities and Stockholders’ Equity

Accounts payable                                                                      $ 17,000                       $ 7,000

Bonds payable                                                                               36,000                         45,000

Common stock                                                                               40,000                         23,000

Retained earnings                                                                          30,000                       10,000

Total liabilities and stockholders’ equity                          $123,000                       $85,000

 

Additional information:

  1. Net income for the year ending December 31, 2015 was $35,000.
  2. Cash dividends of $15,000 were declared and paid during the year.
  3. Long-term investments that had a cost of $17,000 were sold for $14,000.
  4. Sales for 2015 were $120,000.

 

Instructions

Prepare a statement of cash flows for the year ended December 31, 2015, using the indirect method.

 

Ex. 179

A comparative balance sheet for Halpern Corporation is presented below:

HALPERN CORPORATION

Comparative Balance Sheet

   2015                        2014     

Assets

Cash                                                                                                 $ 36,000                 $ 31,000

Accounts receivable (net)                                                                    70,000                     60,000

Prepaid insurance                                                                                 25,000                     17,000

Land                                                                                                     18,000                     40,000

Equipment                                                                                           70,000                     60,000

Accumulated depreciation                                                                  (20,000)                  (13,000)

Total Assets                                                                           $199,000                  $195,000

 

Liabilities and Stockholders’ Equity

Accounts payable                                                                            $ 11,000                   $ 6,000

Bonds payable                                                                                     27,000                     19,000

Common stock                                                                                   140,000                    115,000

Retained earnings                                                                                21,000                    55,000

Total liabilities and stockholders’ equity                                $199,000                  $195,000

 

Additional information:

  1. Net loss for 2015 is $20,000.
  2. Cash dividends of $14,000 were declared and paid in 2015.
  3. Land was sold for cash at a loss of $4,000. This was the only land transaction during the year.
  4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.
  5. $22,000 of bonds were retired during the year at carrying (book) value.
  6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000.

 

Instructions

Prepare a statement of cash flows for the year ended 2015, using the indirect method.

 

Ex. 180

The following information is available for Sally Corporation for the year ended December 31, 2015:

 

Collection of principal on long-term loan to a supplier                                             $15,000

Acquisition of equipment for cash                                                                              10,000

Proceeds from the sale of long-term investment at book value                                   20,000

Issuance of common stock for cash                                                                             27,000

Depreciation expense                                                                                                   28,000

Redemption of bonds payable at carrying (book) value                                              35,000

Payment of cash dividends                                                                                          15,000

Net income                                                                                                                   25,000

Purchase of land by issuing bonds payable                                                                 45,000

 

In addition, the following information is available from the comparative balance sheet for Sally at the end of 2014 and 2015:

 

   2015                       2014  

Cash                                                                            $ 66,000                 $14,000

Accounts receivable (net)                                               20,000                   16,000

Prepaid insurance                                                         18,000                 13,000

Total current assets                                                    $104,000                 $43,000

 

Accounts payable                                                       $ 30,000                 $20,000

Salaries payable                                                               3,000                    7,000

Total current liabilities                                                $ 33,000                 $27,000

 

Instructions

Prepare Sally’s statement of cash flows for the year ended December 31, 2015 using the indirect method.

 

 

Ex. 181

Towson Company prepared the tabulation below at December 31, 2014.

Net Income………………………………………………………………………………………………….       $340,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense, $43,000……………………………………………………………….       _______

Increase in accounts receivable, $50,000………………………………………………….       _______

Decrease in inventory, $13,000………………………………………………………………       _______

Amortization of patent, $4,000………………………………………………………………       _______

Increase in accounts payable, $5,600………………………………………………………       _______

Decrease in interest receivable, $7,000…………………………………………………….       _______

Increase in prepaid expenses, $6,000………………………………………………………       _______

Decrease in income taxes payable, $1,500………………………………………………..       _______

Gain on sale of land, $5,000…………………………………………………………………..       _______

Net cash provided (used) by operating activities………………………………………       _______

Instructions

Show how each item should be reported in the statement of cash flows. Use parentheses for deductions.

 

 

Ex. 182

The current sections of Donny Inc.’s balance sheets at December 31, 2014 and 2015, are presented here.

Donny’s net income for 2015 was $203,000. Depreciation expense was $25,000.

   2015                         2014   

Current assets

Cash                                                                        $115,000                     $99,000

Accounts receivable                                                  105,000                       89,000

Inventory                                                                  154,000                    172,000

Prepaid expense                                                         27,000                       21,000

Total current assets                                          $401,000                   $381,000

Current liabilities

Accrued expenses payable                                      $ 15,000                     $ 5,000

Accounts payable                                                      85,000                       93,000

Total current liabilities                                     $100,000                    $ 98,000

 

Instructions

Prepare the net cash provided by operating activities section of the company’s statement of cash flows for the year ended December 31, 2015, using the indirect method.

 


Ex. 183

Wayne Company reported net income of $265,000 for 2014. Wayne also reported depreciation expense of $45,000 and a loss of $8,000 on the sale of equipment. The comparative balance sheet shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a $6,000 decrease in prepaid expenses.

 

Instructions

Prepare the operating activities section of the statement of cash flows for 2014. Use the indirect method.

 

Ex. 184

 

The three accounts shown below appear in the general ledger of Lawson Corp. during 2014.

 

                                                                        Equipment                                                                   

Date                                                                                          Debit               Credit              Balance

Jan.      1          Balance                                                                                                            160,000

July   31          Purchase of equipment                                   75,000                                      235,000

Sept.    2          Cost of equipment constructed                      56,000                                      291,000

Nov.  10          Cost of equipment sold                                                           45,000             246,000

 

                                                      Accumulated Depreciation—Equipment                                       

Date                                                                                          Debit               Credit              Balance

Jan.     1           Balance                                                                                                              71,000

Nov. 10          Accumulated depreciation on

equipment sold                                             30,000                                      41,000

Dec.   31          Depreciation for year                                                               20,000              61,000


 

Ex. 184         (Cont.)

                                                                Retained Earnings                                                                

Date                                                                                          Debit               Credit              Balance

Jan.     1           Balance                                                                                                            105,000

Aug.  23          Dividends (cash)                                              15,000                                      90,000

Dec.   31          Net income                                                                               50,000            140,000

 

Instructions

From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale of equipment was $7,000. (Hint: Cost of equipment constructed is reported in the investing activities section as a decrease in cash of $56,000.)

 

Ex. 185

Planner Corporation’s comparative balance sheets are presented below.

PLANNER CORPORATION

Comparative Balance Sheets

December 31

   2015                         2014   

Cash                                                                            $ 21,570                      $ 10,700

Accounts receivable                                                       18,200                         23,400

Land                                                                               18,000                         26,000

Building                                                                          70,000                         70,000

Accumulated depreciation                                          (15,000)                     (10,000)

Total                                                                     $112,770                     $120,100

Accounts payable                                                      $ 12,370                       $31,100

Common stock                                                               75,000                         69,000

Retained earnings                                                          25,400                         20,000

Total                                                                      $112,770                     $120,100

 

Additional information:

  1. Net income was $27,900. Dividends declared and paid were $22,500.
  2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $5,900.

 

Instruction

(a)  Prepare a statement of cash flows for 2015 using the indirect method.

(b)  Compute free cash flow.

 

 

Ex. 186

Miroz Corporation’s comparative balance sheets are presented below.

MIROZ CORPORATION

Comparative Balance Sheets

December 31

   2015                         2014   

Cash                                                                            $ 18,700                      $ 22,700

Accounts receivable                                                       24,700                         22,300

Investments                                                                    25,000                         16,000

Equipment                                                                      59,000                         70,000

Accumulated depreciation                                          (14,500)                     (10,000)

Total                                                                      $112,900                    $121,000

Accounts payable                                                       $ 13,600                      $11,100

Bonds payable                                                                 6,000                      30,000

Common stock                                                              50,000                        45,000

Retained earnings                                                           43,300                       34,900

Total                                                                        $112,900                   $121,000

 

Additional information:

  1. Net income was $17,700. Dividends declared and paid were $9,300.
  2. Equipment which cost $11,000 and had accumulated depreciation of $2,000 was sold for $4,000.
  3. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation.

 

Instruction

(a)      Prepare a statement of cash flows for 2015 using the indirect method.

(b)     Compute free cash flow.

 

 

Ex. 187

The following information is available for Young Corporation:

Capital expenditures                        $115,000

Cash dividends                                     75,000

Cash provided by operations            220,000

Net income                                         130,000

Sales                                                   600,000

 

Instructions

Compute Young Corporation’s free cash flow.

 

 

aEx. 188

Dredd Company has begun a worksheet for preparing a statement of cash flows. The following additional information is provided:

  1. Cash dividends of $8,000 were paid during the year.
  2. Land which originally cost $60,000 was sold for $52,000.
  3. Common stock was issued at par value for cash.

Instructions

Complete the worksheet for Dredd Company.

 

DREDD COMPANY

Worksheet

Statement of Cash Flows

For the Year Ended December 31, 2015

Balance                  Reconciling Items                       Balance

Balance Sheet Accounts                    12/31/14           Debits             Credits                   12/31/15

Debits

Cash                                                     30,000                                                                      60,000

Accounts receivable                             40,000                                                                      54,000

Inventory                                             90,000                                                                    112,000

Land                                                     60,000                                                                         -0-

Equipment                                         131,000                                                                    142,000

Total                                            351,000                                                                    368,000

Credits

Accounts payable                                15,000                                                                      10,000

Bonds payable                                     25,000                                                                      10,000

Accumulated depreciation—

equipment                                          81,000                                                                      96,000

Common stock                                   170,000                                                                    180,000

Retained earnings                               60,000                                                                    72,000

Total                                            351,000                                                                    368,000

Statement of Cash Flows Effects

Operating activities

Net income                                                      20,000

 

aEx. 189

Dense Company’s income statement showed revenues of $275,000 and operating expenses of $135,000. Accounts receivable decreased by $40,000 and accounts payable increased by $35,000 during the year.

Instructions

Compute (a) cash receipts from customers and (b) cash payments for operating expenses using the direct method.

 

 

aEx. 190

Clare Company had total operating expenses of $185,000 in 2014, which included Depreciation Expense of $36,000. Also, during 2014, prepaid expenses increased by $8,000 and accrued expenses decreased by $7,600.

Instructions

Calculate the amount of cash payments for operating expenses in 2014 using the direct method.

 

 

aEx. 191

The general ledger of Link Company provides the following information:

End of Year             Beginning of Year

Accounts Receivable                                 $ 55,000                     $ 94,000

Inventory                                                    310,000                       210,000

Accounts Payable                                         40,000                         65,000

The company’s net sales for the year was $2,200,000 and cost of goods sold amounted to $1,500,000.

Instructions

Compute the following:

(a)     Cash receipts from customers.

(b)    Cash payments to suppliers.

 

 

aEx. 192

The income statement of Reagan Inc. for the year ended December 31, 2015, reported the following condensed information:

Service revenue                                                                       $700,000

Operating expenses                                                                 340,000

Income from operations                                                            360,000

Income tax expense                                                                    50,000

Net income                                                                              $310,000

 

Roman’s balance sheet contained the following comparative data at December 31:

   2015                      2014 

Accounts receivable                                                                  $75,000                 $45,000

Accounts payable                                                                       40,000                   50,000

Income taxes payable                                                                    6,000                     4,000

 

Reagan has no depreciable assets. Accounts payable pertains to operating expenses.

 

Instructions

Prepare the operating activities section of the statement of cash flows using the direct method.

 

 

aEx. 193

The income statement of Frank Company is shown below:

FRANK COMPANY

Income Statement

For the Year Ended December 31, 2015

 

Sales                                                                                              $8,400,000

Cost of goods sold                                                                                                         5,400,000

Gross profit                                                                                                                     3,000,000

Operating expenses

Selling expenses                                                                      $500,000

Administrative expense                                                            700,000

Depreciation expense                                                                  90,000

Amortization expense                                                                30,000               1,320,000

Net income                                                                                                                     $1,680,000

Additional information:

  1. Accounts receivable increased $400,000 during the year.
  2. Inventory increased $250,000 during the year.
  3. Prepaid expenses increased $200,000 during the year.
  4. Accounts payable to merchandise suppliers increased $100,000 during the year.
  5. Accrued expenses payable increased $160,000 during the year.

 

Instructions

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2015, for Frank Company, using the direct method.

 

 

aEx. 194

The financial statements of Lowz Company appear below:

LOWZ COMPANY

Comparative Balance Sheet

December 31

   2015                  2014    

Assets

Cash                                                                                                       $ 36,000            $ 23,000

Accounts receivable                                                                                   25,000                34,000

Merchandise inventory                                                                              32,000                15,000

Property, plant, and equipment                                                                50,000                78,000

Accumulated depreciation                                                                        (21,000)             (24,000)

Total                                                                                             $122,000            $126,000

 

Liabilities and Stockholders’ Equity

Accounts payable                                                                                  $ 18,000            $ 23,000

Income taxes payable                                                                                   9,000                  8,000

Bonds payable                                                                                             8,000                33,000

Common stock                                                                                           28,000                24,000

Retained earnings                                                                                      59,000               38,000

Total                                                                                             $122,000            $126,000

 

LOWZ COMPANY

Income Statement

For the Year Ended December 31, 2015

Sales                                                                                                                                  $400,000

Cost of goods sold                                                                                                            270,000

Gross profit                                                                                                                        130,000

Operating expenses                                                                                                              45,000

Income from operations                                                                                                        85,000

Interest expense                                                                                                                     5,000

Income before income taxes                                                                                                  80,000

Income tax expense                                                                                                              24,000

Net income                                                                                                                        $ 56,000

 

 

 

Ex. 194         (Cont.)

The following additional data were provided:

  1. Dividends declared and paid were $35,000.
  2. During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.
  3. All depreciation expense is in the operating expenses.
  4. All sales and purchases are on account.
  5. Accounts payable pertain to merchandise suppliers.
  6. All operating expenses except for depreciation were paid in cash.

 

Instructions

Prepare a statement of cash flows for Lowz Company using the direct method.

 

 
 
+Ex. 195

Condensed financial data of Drake Company appear below:

DRAKE COMPANY

Comparative Balance Sheet

December 31

   2015                   2014   

Assets

Cash                                                                                                       $ 41,000            $ 35,000

Accounts receivable                                                                                   75,000                53,000

Inventories                                                                                               120,000              132,000

Prepaid expenses                                                                                       19,000                25,000

Investments                                                                                             100,000                75,000

Plant assets                                                                                              325,000              250,000

Accumulated depreciation                                                                     (65,000)           (60,000)

Total                                                                                             $615,000            $510,000

 

Liabilities and Stockholders’ Equity

Accounts payable                                                                                  $ 93,000            $ 75,000

Accrued expenses payable                                                                         29,000                24,000

Bonds payable                                                                                         120,000              160,000

Common stock                                                                                         275,000              170,000

Retained earnings                                                                                     98,000               81,000

Total                                                                                             $615,000            $510,000

 

DRAKE COMPANY

Income Statement

For the Year Ended December 31, 2015

Sales                                                                                                       $450,000

Less:

Cost of goods sold                                                                        $300,000

Operating expenses (excluding depreciation)                                    60,000

Depreciation expense                                                                        17,000

Income taxes                                                                                     20,000

Interest expense                                                                                18,000

Loss on sale of plant assets                                                               3,000            418,000

Net income                                                                                                                        $ 32,000

 

Additional information:

  1. New plant assets costing $100,000 were purchased for cash in 2015.
  2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000.
  3. Bonds with a face value of $40,000 were converted into $40,000 of common stock.
  4. A cash dividend of $15,000 was declared and paid during the year.
  5. Accounts payable pertain to merchandise purchases.

Instructions

Prepare a statement of cash flows for the year using the direct method.

 

 

aEx. 196

The income statement for Jones Company showed cost of goods sold of $80,000 and operating expenses of $65,000. The comparative balance sheets for the year show that inventory decreased $5,000, prepaid expenses increased $7,000, accounts payable increased $3,000, and accrued expenses payable decreased $5,000.

Instructions

Compute (a) cash payments to suppliers and (b) cash payments for operating expenses using the direct method.

 

 

 

COMPLETION STATEMENTS

  1. A statement of cash flows summarizes the operating, ____________, and ___________ activities of an entity.

 

 

  1. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows.

 

 

  1. The operating activities section of the statement of cash flows may be prepared using the ______________ method or the ______________ method.

 

 

  1. Net income from operations is generally not the same as cash provided from operations because revenues and expenses are recognized in the income statement on the ______________ basis.

 

 

  1. Using the indirect approach, noncash charges in the income statement are ______________ to net income and noncash credits are ______________ to compute cash provided by operations.

 

 

  1. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis.

 

 

  1. The sale of equipment at less than its book value is a(n) ______________ of cash that is reported in the ______________ activities section.

 

 

  1. Free _______________ equals cash provided by operations less capital expenditures and cash dividends.

 

 

a205.    Under the direct method, noncash charges, such as depreciation, are _______________ in the statement of cash flows.

 

 

a206.    Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________.

 

 

a207.    Cost of goods sold for the year amounted to $130,000, and during the year, accounts payable ______________ by $9,000 and inventory ______________ by $5,000 resulting in cash paid to suppliers of $116,000.

 

 

a208.    In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation.

 

 

a209.    In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense.

 

 

 

MATCHING

Set 1 — Indirect Method

 

  1. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method.

 

  1. Added to net income
  2. Deducted from net income
  3. Cash outflow—investing activity
  4. Cash inflow—investing activity
  5. Cash outflow—financing activity
  6. Cash inflow—financing activity
  7. Significant noncash investing and financing activity

 

____     1.    Decrease in accounts payable during a period

 

____     2.    Declaration and payment of a cash dividend.

 

____     3.    Loss on sale of land.

 

____     4.    Decrease in accounts receivable during a period.

 

____     5.    Redemption of bonds for cash.

 

____     6.    Proceeds from sale of equipment at book value.

 

____     7.    Issuance of common stock for cash.

 

 

Set 1   (Cont.)

 

____     8.    Purchase of a building for cash.

 

____     9.    Acquisition of land in exchange for common stock.

 

____   10.    Increase in merchandise inventory during a period.

 

 

Set 2 — Direct Method

 

a211.    For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method.

 

  1. Added in determining cash receipts from customers
  2. Deducted in determining cash receipts from customers
  3. Added in determining cash payments to suppliers
  4. Deducted in determining cash payments to suppliers
  5. Cash outflow—investing activity
  6. Cash inflow—investing activity
  7. Cash outflow—financing activity
  8. Cash inflow—financing activity
  9. Significant noncash investing and financing activity
  10. Is not shown

 

____    1.   Decrease in accounts payable during a period.

 

____    2.   Declaration and payment of a cash dividend.

 

____    3.   Decrease in accounts receivable during a period.

 

____    4.   Depreciation expense.

 

____    5.   Conversion of bonds payable into common stock.

 

____    6.   Decrease in merchandise inventory during a period.

 

____    7.   Sale of equipment for cash at book value.

 

____    8.   Issuance of preferred stock for cash.

 

____    9.   Purchase of land for cash.

 

____  10.   Loss on sale of a plant asset.

 

 

SHORT-ANSWER ESSAY QUESTIONS

S-A E 212

Distinguish among the three types of activities reported in the statement of cash flows

The three activities are:

 

 

S-A E 213

Why is the statement of cash flows useful?

 

 

 

S-A E 214

The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. (a) What are the sources of information for preparing a statement of cash flows? (b) Explain how the accrual basis of accounting affects the statement of cash flows.

 

 

S-A E 215

Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities.

 

 

 

S-A E 216

How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities?

 


S-A E 217   (Ethics)

Sact Creek Company’s most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter’s performance was better.

 

Ted Flay, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers.

 

Will Smith, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures.

 

Required:

  1. Were Ted Flay’s actions ethical? Explain.
  2. Were Will Smith’s actions ethical? Explain.
  3. Were the company president’s actions ethical? Explain.

 

 

S-A E 218    (Communication)

You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you present a schedule of predicted cash sources and cash needs at the end of each week for the following week.

Jim Bangon, the company’s president, has asked whether a statement of cash flows would also be useful.

 

Required:

Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing.

 


CHALLENGE EXERCISES

 

CE 1

 

The current sections of Remington Inc.’s balance sheets at December 31, 2014 and 2015, are presented here. Remington’s net income for 2015 was $173,000. The income statement included depreciation expense, $20,000, amortization expense, $10,000, and a gain on sale of equipment, $7,000. The equipment was sold for $47,000. Remington also issued bonds for $60,000.

2015                   2014

Current assets

Cash                                                                                  $217,000            $ 99,000

Accounts receivable                                                            120,000                93,000

Inventory                                                                            159,000              176,000

Prepaid expense                                                                   29,000               24,000

Total current assets                                                                       $525,000            $392,000

Current liabilities

Accrued expenses payable                                                $ 17,000            $   9,000

Accounts payable                                                                 88,000                94,000

Total current liabilities                                                                           $105,000            $103,000

Instructions

Prepare the net cash provided by operating activities section of the company’s statement of cash flows for the year ended December 31, 2015, using the indirect method.

CE 2

Here are comparative balance sheets for Porter Company

PORTER COMPANY

Comparative balance Sheets

December 31

Assets                                                                                                          2015                  2014

Cash                                                                                                       $ 53,000            $ 22,000

Accounts receivable                                                                                   92,000                76,000

Inventories                                                                                               175,000              191,000

Land                                                                                                           72,000              100,000

Equipment                                                                                               270,000              200,000

Accumulated depreciation                                                                     (56,000)           (32,000)

Total                                                                                             $606,000            $557,000

Liabilities and Stockholder’s Equity

Accounts payable                                                                                  $ 37,000            $ 47,000

Bonds payable                                                                                         160,000              210,000

Common stock ($1 par)                                                                           216,000              174,000

Retained earnings                                                                                     193,000              126,000

Total                                                                                             $606,000            $557,000

 

Additional information:

  1. Net income for 2015 was $90,000.
  2. Cash dividends of $23,000 were declared and paid.
  3. Bonds payable amounting to $50,000 were redeemed for cash $50,000
  4. Common stock was issued for $42,000 cash
  5. Equipment that cost $50,000 and had a book value of $30,000 was sold for $36,000 during 2015; land was sold at cost.

 

Instructions

(a)    Prepare a statement of cash flows for 2015 using the indirect method.

(b)    Compute free cash flow for 2014

 

CE 3

 

For 2015, the income statement of Hylard Corporation had revenues of $152,000 and operating expenses of $78,000. Accounts receivable and accounts payable at year-end were $60,000 and $23,000, respectively. At the beginning of the year, the balances were $39,000 for accounts receivable and $15,000 for accounts payable. Assume that accounts payable related to operating expenses. Ignore income taxes.

 

Instructions

            Compute net cash provided by operating activities using the direct method.

 

 

 

 

 

Chapter 14

 

FINANCIAL STATEMENT ANALYSIS

 

 

 

CHAPTER LEARNING OBJECTIVES

  1. Discuss the need for comparative analysis.
  2. Identify the tools of financial statement analysis.
  3. Explain and apply horizontal analysis.
  4. Describe and apply vertical analysis.
  5. Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency.
  6. Understand the concept of earning power, and how irregular items are presented.
  7. Understand the concept of quality of earnings.

 

 

TRUE-FALSE STATEMENTS

  1. Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

 

 

  1. Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.

 

 

  1. Measures of a company’s liquidity are concerned with the frequency and amounts of dividend payments.

 

 

  1. Analysis of financial statements is enhanced with the use of comparative data.

 

 

  1. Comparisons of company data with industry averages can provide some insight into the company’s relative position in the industry.

 

 

  1. Vertical and horizontal analyses are concerned with the format used to prepare financial statements.

 

 

  1. Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

 

 

  1. Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

 

 

 

  1. Another name for trend analysis is horizontal analysis.

 

 

  1. If a company has sales of $110 in 2013 and $154 in 2014, the percentage increase in sales from 2013 to 2014 is 140%.

 

 

  1. In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.

 

 

  1. Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.

 

 

  1. Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

 

 

  1. Vertical analysis is useful in making comparisons of companies of different sizes.

 

 

  1. Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

 

 

  1. Using vertical analysis of the income statement, a company’s net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.

 

 

  1. In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.

 

 

  1. A ratio can be expressed as a percentage, a rate, or a proportion.

 

 

  1. A solvency ratio measures the income or operating success of an enterprise for a given period of time.

 

 

  1. The current ratio is a measure of all the ratios calculated for the current year.

 

 

 

  1. Inventory turnover measures the number of times on the average the inventory was sold during the period.

 

 

  1. Profitability ratios are frequently used as a basis for evaluating management’s operating effectiveness.

 

 

  1. The rate of return on total assets will be greater than the rate of return on common stockholders’ equity if the company has been successful in trading on the equity at a gain.

 

 

  1. From a creditor’s point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

 

 

  1. A current ratio of 1.2 to 1 indicates that a company’s current assets exceed its current liabilities.

 

 

  1. Using borrowed money to increase the rate of return on common stockholders’ equity is called “trading on the equity.”

 

 

  1. When the disposal of a significant component occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

 

 

  1. An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.

 

 

  1. Variations among companies in the application of generally accepted accounting principles may reduce quality of earnings.

 

 

  1. Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.

 

 

  1. The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.

 

 

  1. A percentage change can be computed only if the base amount is zero or positive.

 

 

 

  1. In vertical analysis, the base amount in an income statement is usually net sales.

 

 

  1. Profitability ratios measure the ability of the enterprise to survive over a long period of time.

 

 

  1. The days in inventory is computed by multiplying inventory turnover by 365.

 

 

  1. Extraordinary items are reported net of applicable taxes in a separate section of the income statement.

 

 

 

 

 

MULTIPLE CHOICE QUESTIONS

  1. Which one of the following is primarily interested in the liquidity of a company?
  2. Federal government
  3. Stockholders
  4. Long-term creditors
  5. Short-term creditors

 

 

  1. Which one of the following is not a characteristic generally evaluated in analyzing financial statements?
  2. Liquidity
  3. Profitability
  4. Marketability
  5. Solvency

 

 

  1. In analyzing the financial statements of a company, a single item on the financial statements
  2. should be reported in bold-face type.
  3. is more meaningful if compared to other financial information.
  4. is significant only if it is large.
  5. should be accompanied by a footnote.

 

 

 

  1. Short-term creditors are usually most interested in evaluating
  2. solvency.
  3. liquidity.
  4. marketability.
  5. profitability.

 

 

  1. Long-term creditors are usually most interested in evaluating
  2. liquidity and solvency.
  3. solvency and marketability.
  4. liquidity and profitability.
  5. profitability and solvency.

 

 

  1. Stockholders are most interested in evaluating
  2. liquidity and solvency.
  3. profitability and solvency.
  4. liquidity and profitability.
  5. marketability and solvency.

 

 

  1. A stockholder is interested in the ability of a firm to
  2. pay consistent dividends.
  3. appreciate in share price.
  4. survive over a long period.
  5. All of these answer choices are correct.

 

 

  1. Comparisons of financial data made within a company are called
  2. intracompany comparisons.
  3. interior comparisons.
  4. intercompany comparisons.
  5. intramural comparisons.

 

 

  1. A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is
  2. common size analysis.
  3. horizontal analysis.
  4. ratio analysis.
  5. vertical analysis.

 

 

 

  1. Which one of the following is not a tool in financial statement analysis?
  2. Horizontal analysis
  3. Circular analysis
  4. Vertical analysis
  5. Ratio analysis

 

 

  1. In analyzing financial statements, horizontal analysis is a
  2. requirement.
  3. tool.
  4. principle.
  5. theory.

 

 

  1. Horizontal analysis is also called
  2. linear analysis.
  3. vertical analysis.
  4. trend analysis.
  5. common size analysis.

 

 

  1. Vertical analysis is also known as
  2. perpendicular analysis.
  3. common size analysis.
  4. trend analysis.
  5. straight-line analysis.

 

 

  1. In ratio analysis, the ratios are never expressed as a
  2. rate.
  3. negative figure.
  4. percentage.
  5. simple proportion.

 

 

  1. The formula for horizontal analysis of changes since the base period is the current year amount
  2. divided by the base year amount.
  3. minus the base year amount divided by the base year amount.
  4. minus the base year amount divided by the current year amount.
  5. plus the base year amount divided by the base year amount.

 

 

 

  1. Horizontal analysis evaluates a series of financial statement data over a period of time
  2. that has been arranged from the highest number to the lowest number.
  3. that has been arranged from the lowest number to the highest number.
  4. to determine which items are in error.
  5. to determine the amount and/or percentage increase or decrease that has taken place.

 

 

  1. Horizontal analysis evaluates financial statement data
  2. within a period of time.
  3. over a period of time.
  4. on a certain date.
  5. as it may appear in the future.

 

 

  1. Assume the following sales data for a company:

2016                      $1,050,000

2015                           950,000

2014                           800,000

2013                           650,000

If 2013 is the base year, what is the percentage increase in sales from 2013 to 2015?

  1. 100%
  2. 61.5%
  3. 46.2%
  4. 68.4%

 

 

  1. Comparative balance sheets are usually prepared for
  2. one year.
  3. two years.
  4. three years.
  5. four years.

 

 

  1. Horizontal analysis is appropriately performed
  2. only on the income statement.
  3. only on the balance sheet.
  4. only on the statement of retained earnings.
  5. on all three of these statements.

 

 

 

  1. A horizontal analysis performed on a statement of retained earnings would not show a percentage change in
  2. dividends paid.
  3. net income.
  4. expenses.
  5. beginning retained earnings.

 

 

  1. Under which of the following cases may a percentage change be computed?
  2. The trend of the balances is decreasing but all balances are positive.
  3. There is no balance in the base year.
  4. There is a positive balance in the base year and a negative balance in the subsequent year.
  5. There is a negative balance in the base year and a positive balance in the subsequent year.

 

 

  1. Assume the following sales data for a company:

2016                $945,000

2015                  877,500

2014                  675,000

If 2014 is the base year, what is the percentage increase in sales from 2014 to 2015?

  1. 76.9%
  2. 30%
  3. 40%
  4. 71.4%

 

 

  1. Assume the following cost of goods sold data for a company:

2016             $1,704,000

2015               1,400,000

2014               1,200,000

If 2014 is the base year, what is the percentage increase in cost of goods sold from 2014 to 2016?

  1. 70.4%
  2. 42%
  3. 85.7%
  4. 117%

 

 

 

  1. Saira, Inc. has the following income statement (in millions):

SAIRA, INC.

Income Statement

For the Year Ended December 31, 2014

Net Sales                                                                   $300

Cost of Goods Sold                                                  180

Gross Profit                                                              120

Operating Expenses                                                     45

Net Income                                                                 $75

 

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

  1. 40%
  2. 60%
  3. 100%
  4. None of these answer choices are correct.

 

  1. Saira, Inc. has the following income statement (in millions):

SAIRA, INC.

Income Statement

For the Year Ended December 31, 2014

Net Sales                                                                   $300

Cost of Goods Sold                                                  180

Gross Profit                                                              120

Operating Expenses                                                     45

Net Income                                                                 $75

 

Using vertical analysis, what percentage is assigned to Net Income?

  1. 625%
  2. 40%
  3. 25%
  4. None of these answer choices are correct.

 

 

 

  1. Vertical analysis is also called
  2. common size analysis.
  3. horizontal analysis.
  4. ratio analysis.
  5. trend analysis.

 

 

 

  1. Vertical analysis is a technique which expresses each item within a financial statement
  2. in dollars and cents.
  3. in terms of a percentage of the item in the previous year.
  4. in terms of a percent of a base amount.
  5. starting with the highest value down to the lowest value.

 

 

  1. In common size analysis,
  2. a base amount is required.
  3. a base amount is optional.
  4. the same base is used across all financial statements analyzed.
  5. the results of the horizontal analysis are necessary inputs for performing the analysis.

 

  1. In performing a vertical analysis, the base for prepaid expenses is
  2. total current assets.
  3. total assets.
  4. total liabilities and stockholders’ equity.
  5. prepaid expenses.

 

 

  1. In performing a vertical analysis, the base for sales revenues on the income statement is
  2. net sales.
  3. sales.
  4. net income.
  5. cost of goods available for sale.

 

 

  1. In performing a vertical analysis, the base for sales returns and allowances is
  2. sales.
  3. sales discounts.
  4. net sales.
  5. total revenues.

 

 

  1. In performing a vertical analysis, the base for cost of goods sold is
  2. total selling expenses.
  3. net sales.
  4. total revenues.
  5. total expenses.

 

 

  1. Each of the following is a liquidity ratio except the
  2. acid-test ratio.
  3. current ratio.
  4. debt to assets ratio.
  5. inventory turnover.

 

 

 

  1. A ratio calculated in the analysis of financial statements
  2. expresses a mathematical relationship between two numbers.
  3. shows the percentage increase from one year to another.
  4. restates all items on a financial statement in terms of dollars of the same purchasing power.
  5. is meaningful only if the numerator is greater than the denominator.

 

 

  1. A liquidity ratio measures the
  2. income or operating success of an enterprise over a period of time.
  3. ability of the enterprise to survive over a long period of time.
  4. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
  5. number of times interest is earned.

 

 

  1. The current ratio is
  2. calculated by dividing current liabilities by current assets.
  3. used to evaluate a company’s liquidity and short-term debt paying ability.
  4. used to evaluate a company’s solvency and long-term debt paying ability.
  5. calculated by subtracting current liabilities from current assets.

 

 

  1. The acid-test (quick) ratio
  2. is used to quickly determine a company’s solvency and long-term debt paying ability.
  3. relates cash, short-term investments, and net receivables to current liabilities.
  4. is calculated by taking one item from the income statement and one item from the balance sheet.
  5. is the same as the current ratio except it is rounded to the nearest whole percent.

 

 

  1. Blaney Clothing Store had a balance in the Accounts Receivable account of $437,500 at the beginning of the year and a balance of $500,000 at the end of the year. Net credit sales during the year amounted to $3,000,000. The average collection period of the receivables in terms of days was
  2. 53.2 days.
  3. 365 days.
  4. 60.1 days.
  5. 57 days.

 

 

 

 

  1. Fess Hardware Store had net credit sales of $8,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $760,000, respectively. The accounts receivable turnover was
  2. 7.4 times.
  3. 5.9 times.
  4. 11.2 times.
  5. 12.5 times.

 

 

 

  1. Turnbull Department Store had net credit sales of $18,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,500,000. Inventory turnover for the year is
  2. 7.2 times.
  3. 15 times.
  4. 6 times.
  5. 1.5 times.

 

 

 

  1. Turnbull Department Store had net credit sales of $18,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,500,000. The average number of days in inventory during the year was
  2. 365 days.
  3. 60.8 days.
  4. 50.7 days.
  5. 30 days.

 

 

 

  1. Each of the following is included in computing the acid-test ratio except
  2. cash.
  3. inventory.
  4. receivables.
  5. short-term investments.

 

 

  1. Which one of the following would not be considered a liquidity ratio?
  2. Current ratio
  3. Inventory turnover
  4. Acid-test ratio
  5. Return on assets

 

 

 

  1. Asset turnover measures
  2. how often a company replaces its assets.
  3. how efficiently a company uses its assets to generate sales.
  4. the portion of the assets that have been financed by creditors.
  5. the overall rate of return on assets.

 

 

  1. Profit margin is calculated by dividing
  2. sales by cost of goods sold.
  3. gross profit by net sales.
  4. net income by stockholders’ equity.
  5. net income by net sales.

 

 

  1. Ale Corporation had net income of $240,000 and paid dividends to common stockholders of $40,000 in 2014. The weighted average number of shares outstanding in 2014 was 60,000 shares. Ale Corporation’s common stock is selling for $76 per share on the New York Stock Exchange. Ale Corporation’s price-earnings ratio is
  2. 3.2 times.
  3. 22.8 times.
  4. 19 times.
  5. 12.7 times.

 

 

 

  1. Ale Corporation had net income of $240,000 and paid dividends to common stockholders of $40,000 in 2014. The weighted average number of shares outstanding in 2014 was 60,000 shares. Ale Corporation’s common stock is selling for $60 per share on the New York Stock Exchange. Ale Corporation’s payout ratio for 2014 is
  2. $0.71 per share.

b    25%.

  1. 16.7%.
  2. 8%.

 

 

 

  1. Lake Company reported the following on its income statement:

Income before income taxes                            $600,000

Income tax expense                                         150,000

Net income                                                      $450,000

An analysis of the income statement revealed that interest expense was $60,000. Lake Company’s times interest earned was

  1. 11 times.
  2. 10 times.
  3. 8.5 times.
  4. 7.5 times.

 

 

 

  1. The debt to assets ratio measures
  2. the company’s profitability.
  3. whether interest can be paid on debt in the current year.
  4. the proportion of interest paid relative to dividends paid.
  5. the percentage of the total assets provided by creditors.

 

 

  1. Trading on the equity (leverage) refers to the
  2. amount of working capital.
  3. amount of capital provided by owners.
  4. use of borrowed money to increase the return to owners.
  5. number of times interest is earned.

 

 

  1. The current assets of Myers Company are $250,000. The current liabilities are $100,000. The current ratio expressed as a proportion is
  2. 250%.
  3. 2.5 : 1
  4. .25 : 1
  5. $250,000 ÷ $100,000.

 

 

 

  1. The current ratio may also be referred to as the
  2. short run ratio.
  3. acid-test ratio.
  4. working capital ratio.
  5. contemporary ratio.

 

 

  1. A weakness of the current ratio is
  2. the difficulty of the calculation.
  3. that it doesn’t take into account the composition of the current assets.
  4. that it is rarely used by sophisticated analysts.
  5. that it can be expressed as a percentage, as a rate, or as a proportion.

 

 

  1. A supplier to a company would be most interested in the company’s
  2. asset turnover.
  3. profit margin.
  4. current ratio.
  5. earnings per share.

 

 

 

  1. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?
  2. Current ratio
  3. Acid-test ratio
  4. Asset turnover
  5. Accounts receivable turnover

 

 

  1. Ratios are used as tools in financial analysis
  2. instead of horizontal and vertical analyses.
  3. because they may provide information that is not apparent from inspection of the individual components of the ratio.
  4. because even single ratios by themselves are quite meaningful.
  5. because they are prescribed by GAAP.

 

 

  1. The ratios that are used to determine a company’s short-term debt paying ability are
  2. asset turnover, times interest earned, current ratio, and accounts receivable turnover.
  3. times interest earned, inventory turnover, current ratio, and accounts receivable turnover.
  4. times interest earned, acid-test ratio, current ratio, and inventory turnover.
  5. current ratio, acid-test ratio, accounts receivable turnover, and inventory turnover.

 

 

  1. A measure of the percentage of each dollar of sales that results in net income is
  2. profit margin.
  3. return on assets.
  4. return on common stockholders’ equity.
  5. earnings per share.

 

 

  1. Nord Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $70,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of Nord Company’s working capital?
  2. No effect
  3. $70,000 increase
  4. $140,000 increase
  5. $70,000 decrease

 

 

  1. Nord Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $70,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Nord Company’s current ratio?
  2. The ratio remained unchanged.
  3. The change in the current ratio cannot be determined.
  4. The ratio decreased.
  5. The ratio increased.

 

 

  1. If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always
  2. increase.
  3. decrease.
  4. stay the same.
  5. equal zero.

 

 

  1. The acid-test ratio
  2. is a quick calculation of an approximation of the current ratio.
  3. does not include all current liabilities in the calculation.
  4. does not include inventory as part of the numerator.
  5. does include prepaid expenses as part of the numerator.

 

 

  1. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

Short-term Borrowing       Collection of Receivable

  1. Increase No effect
  2. Increase Increase
  3. Decrease No effect
  4. Decrease Decrease

 

 

  1. A company has a accounts receivable turnover of 10 times. The average accounts receivable during the period are $400,000. What is the amount of net credit sales for the period?
  2. $40,000
  3. $4,000,000
  4. $400,000
  5. Cannot be determined from the information given

 

 

 

  1. If the average collection period is 60 days, what is the accounts receivable turnover?
  2. 6.0 times
  3. 6.1 times
  4. 12.2 times
  5. None of these

 

 

 

  1. A general rule to use in assessing the average collection period is that
  2. it should not exceed 30 days.
  3. it can be any length as long as the customer continues to buy merchandise.
  4. it should not greatly exceed the discount period.
  5. it should not greatly exceed the credit term period.

 

 

 

  1. Inventory turnover is calculated by dividing
  2. cost of goods sold by the ending inventory.
  3. cost of goods sold by the beginning inventory.
  4. cost of goods sold by the average inventory.
  5. average inventory by cost of goods sold.

 

 

  1. A company has an average inventory on hand of $60,000 and the days in inventory is 73 days. What is the cost of goods sold?
  2. $300,000
  3. $4,380,000
  4. $600,000
  5. $2,190,000

 

 

 

  1. A successful grocery store would probably have
  2. a low inventory turnover.
  3. a high inventory turnover.
  4. zero profit margin.
  5. low volume.

 

 

  1. An aircraft company would most likely have
  2. a high inventory turnover.
  3. low profit margin.
  4. high volume.
  5. a low inventory turnover.

 

 

  1. Net sales are $8,000,000, beginning total assets are $2,500,000, and the asset turnover is 4.0 times. What is the ending total asset balance?
  2. $2,000,000
  3. $1,500,000
  4. $2,800,000
  5. $2,500,000

 

 

 

  1. Earnings per share is calculated
  2. only for common stock.
  3. only for preferred stock.
  4. for common and preferred stock.
  5. only for treasury stock.

 

 

 

  1. Which of the following is not a profitability ratio?
  2. Payout ratio
  3. Profit margin
  4. Times interest earned
  5. Return on common stockholders’ equity

 

 

  1. Times interest earned is also called the
  2. money multiplier.
  3. interest coverage ratio.
  4. coupon coverage ratio.
  5. premium ratio.

 

 

  1. The ratio that uses weighted average common shares outstanding in the denominator is the
  2. price-earnings ratio.
  3. return on common stockholders’ equity.
  4. earnings per share.
  5. payout ratio.

 

 

  1. Net income does not appear in the numerator of the
  2. profit margin.
  3. return on assets.
  4. return on common stockholders’ equity.
  5. payout ratio.

 

 

  1. Swiss Clothing Store had a balance in the Accounts Receivable account of $820,000 at the beginning of the year and a balance of $780,000 at the end of the year. Net credit sales during the year amounted to $7,200,000. The accounts receivable turnover ratio was
  2. 9.0 times.
  3. 8.4 times.
  4. 9.2 times.
  5. 8.8 times.

 

 

 

 

  1. Swiss Clothing Store had a balance in the Accounts Receivable account of $920,000 at the beginning of the year and a balance of $980,000 at the end of the year. Net credit sales during the year amounted to $6,650,000. The average collection period of the receivables in terms of days was
  2. 53.7 days.
  3. 52.1 days.
  4. 30 days.
  5. 50.7 days.

 

 

 

  1. Blitzen Corporation had net income of $200,000 and paid dividends to common stockholders of $50,000 in 2014. The weighted average number of shares outstanding in 2014 was 40,000 shares. Blitzen Corporation’s common stock is selling for $35 per share on the New York Stock Exchange. Blitzen Corporation’s price-earnings ratio is
  2. 5.6 times.
  3. 7 times.
  4. 5 times.
  5. 9.3 times.

 

 

 

  1. Blitzen Corporation had net income of $500,000 and paid dividends to common stockholders of $40,000 in 2014. The weighted average number of shares outstanding in 2014 was 60,000 shares. Blitzen Corporation’s common stock is selling for $50 per share on the New York Stock Exchange. Blitzen Corporation’s payout ratio for 2014 is
  2. $8.33 per share.
  3. 8%.
  4. 12%.
  5. 16%.

 

 

 

  1. Country Company reported the following on its income statement:

Income before income taxes                            $850,000

Income tax expense                                         250,000

Net income                                                      $650,000

An analysis of the income statement revealed that interest expense was $100,000. Country Company’s times interest earned was

  1. 3.4 times.
  2. 9.5 times.
  3. 6.5 times.
  4. 8.5 times.

 

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     20,000

Property, plant and equipment                                                               210,000

Total Assets                                                                                $305,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     95,000

Stockholders’ equity—common                                                              160,000

Total Liabilities and Stockholders’ Equity                                  $305,000

 

Income Statement

Sales                                                                                                       $ 120,000

Cost of goods sold                                                                                      66,000

Gross profit                                                                                                 54,000

Operating expenses                                                                                     30,000

Net income                                                                                  $ 24,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

What is the current ratio for Ortiz?

  1. 1.90
  2. 1.50
  3. 1.30
  4. .53

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            40,000

Inventory                                                                                                     20,000

Property, plant and equipment                                                               210,000

Total Assets                                                                                $305,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     95,000

Stockholders’ equity—common                                                              160,000

Total Liabilities and Stockholders’ Equity                                  $305,000

 

MC 120.   (Cont.)

Income Statement

Sales                                                                                                       $ 110,000

Cost of goods sold                                                                                      66,000

Gross profit                                                                                                 44,000

Operating expenses                                                                                     30,000

Net income                                                                                  $ 14,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

What is the accounts receivable turnover for Ortiz?

  1. 1.3 times
  2. 1.1 times
  3. 2.8 times
  4. 12.7 times

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            25,000

Inventory                                                                                                     12,000

Property, plant and equipment                                                               210,000

Total Assets                                                                                $292,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     90,000

Stockholders’ equity—common                                                              152,000

Total Liabilities and Stockholders’ Equity                                  $292,000

 

Income Statement

Sales                                                                                                       $ 120,000

Cost of goods sold                                                                                       66,000

Gross profit                                                                                                 54,000

Operating expenses                                                                                     30,000

Net income                                                                                  $ 24,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

 

MC 121.   (Cont.)

 

What is the inventory turnover for Ortiz?

  1. 3,2 times
  2. 5.5 times
  3. 11 times
  4. 0.18 times

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     40,000

Property, plant and equipment                                                               310,000

Total Assets                                                                                $425,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 55,000

Long-term liabilities                                                                                   110,000

Stockholders’ equity—common                                                              260,000

Total Liabilities and Stockholders’ Equity                                  $425,000

 

Income Statement

Sales                                                                                                       $ 120,000

Cost of goods sold                                                                                      65,000

Gross profit                                                                                                 55,000

Operating expenses                                                                                     29,500

Net income                                                                                  $ 25,500

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

What is the return on assets for Ortiz?

  1. 6.0%
  2. 5.0%
  3. 10.0%
  4. 12.0%

 

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            25,000

Inventory                                                                                                     20,000

Property, plant and equipment                                                               310,000

Total Assets                                                                                $400,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     90,000

Stockholders’ equity—common                                                              260,000

Total Liabilities and Stockholders’ Equity                                  $400,000

 

Income Statement

Sales                                                                                                       $ 300,000

Cost of goods sold                                                                                      66,000

Gross profit                                                                                               234,000

Operating expenses                                                                                     27,000

Net income                                                                                $ 207,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

What is the profit margin for Ortiz?

  1. 113%
  2. 28.2%
  3. 69%
  4. 78%

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            25,000

Inventory                                                                                                     20,000

Property, plant and equipment                                                               270,000

Total Assets                                                                                $360,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     90,000

Stockholders’ equity—common                                                              220,000

Total Liabilities and Stockholders’ Equity                                  $360,000

 

MC 124.   (Cont.)

Income Statement

Sales                                                                                                       $ 150,000

Cost of goods sold                                                                                      66,000

Gross profit                                                                                                 84,000

Operating expenses                                                                                     29,000

Net income                                                                                  $ 55,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $20

Dividends per share                                                                                           .50

 

What is the return on common stockholders’ equity for Ortiz?

  1. 25%
  2. 50%
  3. 12.5%
  4. 15.3%

 

 

 

  1. The following information pertains to Ortiz Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 45,000

Accounts receivable (net)                                                                            25,000

Inventory                                                                                                     20,000

Property, plant and equipment                                                               210,000

Total Assets                                                                                $300,000

 

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 50,000

Long-term liabilities                                                                                     90,000

Stockholders’ equity—common                                                              160,000

Total Liabilities and Stockholders’ Equity                                  $300,000

 

Income Statement

Sales                                                                                                       $ 100,000

Cost of goods sold                                                                                      55,000

Gross profit                                                                                                 45,000

Operating expenses                                                                                     15,000

Net income                                                                                  $ 30,000

 

Number of shares of common stock                                                              6,000

Market price of common stock                                                                        $30

Dividends per share                                                                                           .50

 

 

MC 125.   (Cont.)

 

What is the price-earnings ratio for Ortiz?

  1. 6.0 times
  2. 1.1 times
  3. 5 times
  4. 5.5 times

 

 

 

  1. The following information pertains to Rural Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 40,500

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     27,000

Property, plant and equipment                                                               215,000

Total Assets                                                                                $312,500

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 60,000

Long-term liabilities                                                                                     75,000

Stockholders’ equity—common                                                              177,500

Total Liabilities and Stockholders’ Equity                                        $312,500

Income Statement

Sales                                                                                                         $ 90,000

Cost of goods sold                                                                                      40,000

Gross profit                                                                                                 50,000

Operating expenses                                                                                    25,000

Net income                                                                                        $ 25,000

Number of shares of common stock                                                              5,000

Market price of common stock                                                                        $22

Dividends per share                                                                                         1.00

 

What is the return on assets for Rural?

  1. 16%
  2. 9.7%
  3. 8%
  4. 17%

 

 

 

 

  1. The following information pertains to Rural Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 40,000

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     25,000

Property, plant and equipment                                                               215,000

Total Assets                                                                                $310,000

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 60,000

Long-term liabilities                                                                                     75,000

Stockholders’ equity—common                                                              175,000

Total Liabilities and Stockholders’ Equity                                        $310,000

Income Statement

Sales                                                                                                       $ 130,000

Cost of goods sold                                                                                      45,000

Gross profit                                                                                                 85,000

Operating expenses                                                                                    25,000

Net income                                                                                        $ 60,000

Number of shares of common stock                                                              5,000

Market price of common stock                                                                        $22

Dividends per share                                                                                         1.00

 

What is the profit margin for Rural?

  1. 27.8%
  2. 70.6%
  3. 65.4%
  4. 46.2%

 

  1. The following information pertains to Rural Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 40,000

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     40,000

Property, plant and equipment                                                               220,000

Total Assets                                                                                $330,000

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 60,000

Long-term liabilities                                                                                     70,000

Stockholders’ equity—common                                                              200,000

Total Liabilities and Stockholders’ Equity                                        $330,000


MC 128.   (Cont.)

Income Statement

Sales                                                                                                         $ 90,000

Cost of goods sold                                                                                      44,000

Gross profit                                                                                                 46,000

Operating expenses                                                                                    30,000

Net income                                                                                        $ 16,000

Number of shares of common stock                                                              5,000

Market price of common stock                                                                        $22

Dividends per share                                                                                         1.00

 

What is the return on common stockholders’ equity for Rural?

  1. 4.8%
  2. 8%
  3. 37.5%
  4. 16%

 

 

 

  1. The following information pertains to Rural Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments                                                            $ 40,000

Accounts receivable (net)                                                                            30,000

Inventory                                                                                                     25,000

Property, plant and equipment                                                               215,000

Total Assets                                                                                $310,000

Liabilities and Stockholders’ Equity

Current liabilities                                                                                     $ 60,000

Long-term liabilities                                                                                     75,000

Stockholders’ equity—common                                                              175,000

Total Liabilities and Stockholders’ Equity                                        $310,000

Income Statement

Sales                                                                                                         $ 95,000

Cost of goods sold                                                                                      45,000

Gross profit                                                                                                 50,000

Operating expenses                                                                                    15,000

Net income                                                                                        $ 35,000

Number of shares of common stock                                                              5,000

Market price of common stock                                                                        $21

Dividends per share                                                                                         1.00

 

 

MC 129.   (Cont.)

 

What is the price-earnings ratio for Rural?

  1. 8 times
  2. 4.0 times
  3. 7.0 times
  4. 3.0 times

 

 

 

  1. The following information is available for Oakland Company:

 

     2015                                              2014    

Accounts receivable                $   430,000           $   460,000

Inventory                                     280,000                320,000

Net credit sales                         2,670,000             1,600,000

Cost of goods sold                    1,860,000             1,060,000

Net income                                   300,000                170,000

 

The accounts receivable turnover ratio for 2015 is

  1. 1.4 times.
  2. 6.2 times.
  3. 6.0 times.
  4. 5.8 times.

 

 

 

  1. The following information is available for Oakland Company:

 

     2015                                              2014    

Accounts receivable                $   360,000           $   400,000

Inventory                                     340,000                400,000

Net credit sales                         2,470,000             1,400,000

Cost of goods sold                    1,850,000             1,060,000

Net income                                   300,000                170,000

 

The inventory turnover ratio for 2015 is

  1. 6.7 times.
  2. 5.0 times.
  3. 5.4 times.
  4. 4.6 times.

 

 

 

 

  1. The following amounts were taken from the financial statements of Leaf Company:

   2015                                                                                                     2014           

Total assets                                                                              $800,000          $880,000

Net sales                                                                                     720,000            650,000

Gross profit                                                                                352,000            320,000

Net income                                                                                 126,000            117,000

Weighted average number of common shares outstanding           90,000              90,000

Market price of common stock                                                         $35                   $39

 

The return on assets ratio for 2015 is

  1. 15.8%.
  2. 15%.
  3. 14.3%.
  4. 14.5%.

 

 

 

  1. The following amounts were taken from the financial statements of Leaf Company:

   2015                                                                                                     2014           

Total assets                                                                              $900,000       $1,000,000

Net sales                                                                                     840,000            650,000

Gross profit                                                                                352,000            320,000

Net income                                                                                 138,600            117,000

Weighted average number of common shares outstanding           90,000              90,000

Market price of common stock                                                         $35                   $39

 

The profit margin ratio for 2015 is

  1. 15.4%.
  2. 44.9%.
  3. 16.5%.
  4. 10.7%.

 

 

 

  1. The following amounts were taken from the financial statements of Leaf Company:

   2015                                                                                                     2014           

Total assets                                                                              $800,000       $1,000,000

Net sales                                                                                     720,000            650,000

Gross profit                                                                                352,000            320,000

Net income                                                                                 150,000            117,000

Weighted average number of common shares outstanding           50,000              90,000

Market price of common stock                                                    $64.50                   $39

 

 

MC 134.   (Cont.)

 

The price-earnings ratio for 2015 is

  1. 21.5 times.
  2. 36 times.
  3. 4.5 times.
  4. 3.0 times.

 

 

 

  1. Quasar Corporation had net income of $300,000 and paid dividends to common stockholders of $40,000 in 2015. The weighted average number of shares outstanding in 2015 was 60,000 shares. Quasar Corporation’s common stock is selling for $35 per share on the New York Stock Exchange.

 

Quasar Corporation’s price-earnings ratio is

  1. 5.7 times.
  2. 7 times.
  3. 14 times.
  4. 8.1 times.

 

 

  1. Quasar Corporation had net income of $210,000 and paid dividends to common stockholders of $63,000 in 2015. The weighted average number of shares outstanding in 2015 was 50,000 shares. Quasar Corporation’s common stock is selling for $30 per share on the New York Stock Exchange.

 

Quasar Corporation’s payout ratio for 2015 is

  1. 24%.
  2. 30%.
  3. 26%.
  4. $3.33 per share.

 

 

 

  1. The following financial statement information is available for Buil Corporation:

   2015          2014                  

Inventory                   $ 44,000                     $ 43,000

Current assets                80,000                       106,000

Total assets                  432,000                       358,000

Current liabilities           25,000                         36,000

Total liabilities             102,000                         88,000

 

The current ratio for 2015 is

  1. .31:1.
  2. 3.2:1.
  3. 1.5:1.
  4. 4.24:1.

 

 

 

 

  1. The following financial statement information is available for James Corporation:

   2015         2014                

Net sales                    $780,000                     $697,000

Cost of goods sold       406,000                       377,000

Net income                   120,000                         80,000

Tax expense                   48,000                         29,000

Interest expense             14,000                         14,000

 

The profit margin ratio for 2015 is

  1. 15.4%.
  2. 47.9%.
  3. 32.1%.
  4. 13.5%.

 

 

 

  1. The following financial statement information is available for Penn Corporation:

   2015         2014                                               

Stockholders’ equity – common                 $350,000           $270,000

Net sales                                                      784,000             697,000

Cost of goods sold                                       406,000             377,000

Net income                                                   115,000               80,000

Inc tax expense                                               48,000               29,000

Interest expense                                             14,000               14,000

Dividends paid to preferred

stockholders                                              24,000               20,000

Dividends paid to common

stockholders                                              15,000               10,000

The return on common stockholders’ equity for 2015 is

  1. 24.5%.
  2. 32.9%.
  3. 26%.
  4. 29.4%.

 

 

 

  1. The following financial statement information is available for Long Corporation:

   2015        2014                                         

Net income                                          $115,000                $ 80,000

Income tax expense                                 30,000                    29,000

Interest expense                                      18,000                    14,000

Dividends paid to preferred

stockholders                                       22,000                    20,000

Dividends paid to preferred

stockholders                                       15,000                    10,000

 

 

MC 140.   (Cont.)

 

The times interest earned for 2015 is

  1. 7.4 times.
  2. 6.4 times.
  3. 9.1 times.
  4. 7.8 times.

 

 

 

  1. Dean Corporation reported net income $58,000, net sales $500,000, and average assets $800,000 for 2015. The 2015 profit margin was:
  2. 5.8%.
  3. 11.6%.
  4. 62.5%.
  5. 160%.

 

 

 

  1. North Company reports the following amounts for 2015:

Net income                                                $   160,000

Average stockholders’ equity                     2,000,000

Preferred dividends                                          45,000

Par value preferred stock                               250,000

 

The 2015 rate of return on common stockholders’ equity is:

  1. 5.8%.
  2. 6.6%.
  3. 8.0%.
  4. 9.1%.

 

 

 

  1. Proctor Corporation had beginning inventory $100,000, cost of goods sold $750,000, and ending inventory $150,000. What was Proctor’s inventory turnover?
  2. 3 times.
  3. 6 times.
  4. 7.5 times.
  5. 5 times.

 

 

 

  1. In 2015 Rome Corporation reported net income $190,000, interest expense $60,000, and income tax expense $40,000. Rome’s times interest earned ratio was:
  2. 4.2 times.
  3. 3.8 times.
  4. 3.2 times.
  5. 4.8 times.

 

 

 

  1. Wrapp Company has income before taxes of $350,000 and an extraordinary loss of $70,000. If the income tax rate is 30% on all items, the income statement should show income before irregular items and an extraordinary loss, respectively, of:
  2. $350,000 and ($70,000)
  3. $245,000 and ($24,000)
  4. $245,000 and ($49,000)
  5. $105,000 and ($21,000)

 

 

 

  1. All of the following statements regarding changes in accounting principles are true except:
  2. Most changes in accounting principles are only reported in current periods when the principle change takes place.
  3. Changes in accounting principles are allowed when new principles are preferable to old ones.
  4. Most changes in accounting principles are retroactively reported.
  5. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

 

 

  1. Beta’s Bunny Barn has experienced a $80,000 loss due to tornado damage to its inventory. Tornados have never before occurred in this area. Assuming that the company’s tax rate is 30%, what amount will be reported for this loss on the income statement?
  2. $80,000
  3. $56,000
  4. $24,000
  5. $72,000

 

 

 

  1. Flite Company reported income before taxes of $900,000 and an extraordinary loss of $250,000. Assume that the company’s tax rate is 35%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively?
  2. $585,000 and $250,000
  3. $585,000 and $162,500
  4. $650,000 and $250,000
  5. $650,000 and $162,500

 

 

 

 

  1. Kreig Corporation has income before taxes of $900,000 and an extraordinary gain of $300,000. If the income tax rate is 35% on all items, the income statement should show income before irregular items and extraordinary items, respectively, of
  2. $600,000 and $300,000.
  3. $600,000 and $195,000.
  4. $585,000 and $300,000.
  5. $585,000 and $195,000.

 

 

 

  1. Pan Inc. has an investment in available-for-sale securities of $70,000. This investment experienced an unrealized loss of $6,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be
  2. no effect.
  3. $70,000 increase.
  4. $24,500 decrease.
  5. $6,000 decrease.

 

 

  1. The disposal of a significant component of a business is called
  2. a change in accounting principle.
  3. an extraordinary item.
  4. an other expense.
  5. discontinued operations.

 

 

  1. MECHE Company reports income before income taxes of $2,500,000 and had an extra-ordinary loss of $800,000. If the tax rate is 35%,
  2. the income before the extraordinary item is $1,190,000.
  3. the extraordinary loss would be reported on the income statement at $800,000.
  4. the income before the extraordinary item is $1,625,000.
  5. the extraordinary loss will be reported at $280,000.

 

 

 

  1. Beacon, Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $350,000 loss in the year of disposal. The loss on disposal of the segment was $150,000. If the tax rate is 30%, and income before income taxes was $2,300,000,
  2. the income tax expense on the income before discontinued operations is $540,000.
  3. the income from continuing operations is $1,610,000.
  4. net income is $1,800,000.
  5. the losses from discontinued operations are reported net of income taxes at $150,000.

 

 

 

 

  1. Each of the following is an extraordinary item except the
  2. effects of major casualties, if rare in the area.
  3. effects of a newly enacted law or regulation.
  4. expropriation of property by a foreign government.
  5. losses attributable to labor strikes.

 

 

  1. The discontinued operations section of the income statement refers to
  2. discontinuance of a product line.
  3. the income or loss on products that have been completed and sold.
  4. obsolete equipment and discontinued inventory items.
  5. the disposal of a significant component of a business.

 

 

  1. Which one of the following would be classified as an extraordinary item?
  2. Expropriation of property by a foreign government
  3. Losses attributed to a labor strike
  4. Write-down of inventories
  5. Gains or losses from sales of equipment

 

 

  1. A loss on the write down of obsolete inventory should be reported as
  2. “other expenses and losses.”
  3. part of discontinued operations.
  4. an operating expense.
  5. an extraordinary item.

 

 

  1. If an item meets one (but not both) of the criteria for an extraordinary item, it
  2. only needs to be disclosed in the footnotes of the financial statements.
  3. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).
  4. is reported as an “other revenue or gain” or “other expense and loss,” net of tax.
  5. is reported at its gross amount as an “other revenue or gain” or “other expense or loss.”

 

 

  1. The order of presentation of nontypical items that may appear on the income statement is
  2. Extraordinary items, Discontinued operations, Other revenues and expenses.
  3. Discontinued operations, Extraordinary items, Other revenues and expenses.
  4. Other revenues and expenses, Discontinued operations, Extraordinary items.
  5. Other revenues and expenses, Extraordinary items, Discontinued operations.

 

 

  1. Each of the following is a factor affecting quality of earnings except
  2. alternative accounting methods.
  3. improper recognition.
  4. pro forma income.
  5. extraordinary items.

 

 

 

  1. Comparisons can be made on each of the following bases except
  2. industry averages.
  3. intercompany basis.
  4. intracompany basis.
  5. Each of these is a basis for comparison.

 

 

162…. Comparisons of data within a company are an example of the following comparative basis:

  1. Industry averages
  2. Intercompany
  3. Intracompany
  4. Interregional

 

 

163…. Carter Corporation reported net sales of $250,000, $400,000, and $600,000 in the years 2013, 2014, and 2015 respectively. If 2013 is the base year, what is the trend percentage for 2015?

  1. 100%
  2. 40%
  3. 140%
  4. 240%

 

 

 

  1. In vertical analysis, the base amount for each income statement item is
  2. gross profit.
  3. net income.
  4. net sales.
  5. sales.

 

 

  1. When performing vertical analysis, the base amount for administrative expense is generally
  2. administrative expense in a previous year.
  3. net sales.
  4. gross profit.
  5. fixed assets.

 

 

  1. Ratios that measure the short-term ability of the company to pay its maturing obligations are
  2. liquidity ratios.
  3. profitability ratios.
  4. solvency ratios.
  5. trend ratios.

 

 

  1. What type of ratios best measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash?
  2. Leverage
  3. Solvency
  4. Profitability
  5. Liquidity

 

 

  1. The acid-test ratio is also known as the
  2. current ratio.
  3. quick ratio.
  4. fast ratio.
  5. times interest earned ratio.

 

 

  1. The debt to assets ratio
  2. is a solvency ratio.
  3. is computed by dividing total assets by total debt.
  4. measures the total assets provided by stockholders.
  5. is a profitability ratio.

 

  1. An extraordinary item is one that
  2. occurs infrequently and is uncontrollable in nature.
  3. occurs infrequently and is unusual in nature.
  4. is material and is unusual in nature.
  5. is material and is uncontrollable in nature.

 

 

  1. Troy, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,260,000 are sold for $840,000. Operating income from January 1 to June 30 for the division amounted to $130,000. Ignoring income taxes, what total amount should be reported on Troy’s income statement for the current year under the caption, Discontinued Operations?
  2. $130,000
  3. $290,000 loss
  4. $420,000 loss
  5. $550,000

 

 

 

  1. When there has been a change in accounting principle,
  2. the old principle should be used in reporting the results of operations for the current year.
  3. the cumulative effect of the change should be reported in the current year’s retained earnings statement.
  4. the change should be reported retroactively.
  5. the new principle should be used in reporting the results of operations of the current year, but there is no change to prior years.

 

 

  1. Under IFRS, there is no classification for
  2. changes in accounting estimates.
  3. changes in accounting principles.
  4. discontinued operations.
  5. extraordinary items.

 

 

  1. The accounting for each of the following is the same under IFRS and GAAP except for
  2. extraordinary items.
  3. discontinued operations.
  4. changes in accounting principles.
  5. changes in accounting estimates.

 

 

  1. Distinguishing normal levels of income from irregular items is of interest for the

FASB              IASB

  1. no no
  2. no yes
  3. yes no
  4. yes yes

 

 

  1. All revenue and expense items are considered ordinary in nature under
  2. both IFRS and GAAP.
  3. GAAP.
  4. IFRS.
  5. neither IFRS or GAAP.

 

 

  1. Under IFRS, the statement of comprehensive income can be prepared under
  2. the one-statement approach only.
  3. the two-statement approach only.
  4. either the one-statement approach or the two-statement approach
  5. either the two-statement approach or the stockholders’ equity statement approach.

 

 

  1. Under IFRS, the components of other comprehensive income can be reported in each of the following ways except
  2. the one-statement approach.
  3. the two-statement approach.
  4. the statement of stockholders’ equity approach.
  5. All of these answer choices are correct.

 

 

 

  1. Under IFRS, which of the following is not an acceptable way of displaying the components of other comprehensive income?
  2. Combined statement of retained earnings
  3. One-statement approach
  4. Two-statement approach
  5. All of these answer choices are correct.

 

 

  1. Under IFRS, comprehensive income may be displayed (reported) in
  2. the equity section of the statement of financial position.
  3. the one-statement or the two-statement approach.
  4. two-statement approach only.
  5. the retained earnings statement.

 

 

BRIEF EXERCISES

BE 181

The following items were taken from the financial statements of Henager, Inc., over a three-year period:

           Item                       2016              2015                2014   

Net Sales                        $355,000         $340,000         $300,000

Cost of Goods Sold       214,000         202,000         186,000

Gross Profit                   $141,000         $138,000         $114,000

 

Instructions

Compute the following for each of the above time periods.

  1. The amount and percentage change from 2014 to 2015.
  2. The amount and percentage change from 2015 to 2016.

 

BE 182

If Dolly Company had net income of $550,000 in 2016 and it experienced a 25% increase in net income over 2015, what was its 2015 net income?

 

 

BE 183

Horizontal analysis (trend analysis) percentages for Staas Company’s sales, cost of goods sold, and expenses are listed here.

Horizontal Analysis               2016                    2015                    2014 

Sales                                          98.2%                  104.8%                  100.0%

Cost of goods sold                  102.5                       98.0                     100.0

Expenses                                 108.6                       96.4                     100.0


BE 183               (Cont.)

 

Instructions

Explain whether Staas’ net income increased, decreased, or remained unchanged over the 3-year period.

 

 

BE 184

Using the following operating data for Complex Corporation, illustrate horizontal analysis.

   2015                2014 

Net sales                              $350,000            $300,000

Cost of goods sold                 240,000              160,000

Operating expenses                  80,000              120,000

Net income                               30,000                20,000

 

 

BE 185

Using the following operating data for Complex Corporation, prepare a schedule showing a vertical analysis for 2015.

   2015                2014 

Net sales                              $360,000            $320,000

Cost of goods sold                 210,000              180,000

Operating expenses                112,000              100,000

Net income                               38,000                40,000

 

BE 186

Using these data from the comparative balance sheet of Banner Company, perform vertical analysis.

 

December 31, 2016      December 31, 2015

Accounts receivable                        $   480,000                   $   336,000

Inventory                                             720,000                        504,000

Total assets                                      4,000,000                     2,800,000

 

 

BE 187

For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio (L), a profitability ratio (P), or a solvency ratio (S).

 

____    1.   Times interest earned ratio

____    2.   Asset turnover

____    3.   Accounts receivable turnover

____    4.   Debt to assets ratio

____    5.   Current ratio

____    6.   Payout ratio

 

 


BE 188

Selected financial statement data for Freeman Company are presented below.

12/31/15

Cash                                                                            $ 10,000

Short-term investments                                                  20,000

Accounts receivable                                                        60,000

Inventories                                                                      75,000

Total current liabilities                                                  100,000

 

Instructions

Compute the following ratios at December 31, 2015:

(a)   Current.

(b)   Acid-test.

 

 

BE 189

Noble Company had net income of $175,000 and net sales of $625,000 in 2015. The company’s total assets for 2014/2015 averaged $4,000,000. Its common stockholders’ equity for the period averaged $2,340,000. Calculate (a) profit margin, (b) return on assets, and (c) return on common stockholders’ equity.

 

 

BE 190

Shelly Company reported the following financial information:

 

12/31/15               12/31/14

Accounts receivable                               $   340,000           $   360,000

Net credit sales                                        2,450,000            2,420,000

 

Compute (a) the accounts receivable turnover and (b) the average collection period for 2015.

 

 


BE 191

Prepare a partial income statement, beginning with income before income taxes using the following information for Stone Corporation for the fiscal year ended December 31, 2015:

Sales                                                                            $720,000

Extraordinary loss                                                           80,000

Operating expenses                                                       180,000

Cost of goods sold                                                        400,000

Loss on sale of land                                                        25,000

Stone Corporation is subject to a 30% income tax rate.

 

 

EXERCISES

Ex. 192

Selected financial information for Trant Corporation is presented below.

December 31, 2016         December 31, 2015

Current assets                       $ 55,000                        $ 40,000

Long-term liabilities                  90,000                            80,000

Retained earnings                    125,000                          100,000

 

Instructions

Prepare a schedule showing a horizontal analysis for 2016 using 2015 as the base year.

 

Ex. 193

Comparative information taken from the Foren Company financial statements is shown below:

   2016                     2015   

(a)     Notes receivable                                                          $ 20,000               $   -0-

(b)    Accounts receivable                                                      175,000                 140,000

(c)     Retained earnings                                                            30,000                (40,000)

(d)    Income taxes payable                                                      55,000                   20,000

(e)     Sales                                                                              900,000                 750,000

(f)     Operating expenses                                                       160,000                 200,000

 

Instructions

Using horizontal analysis, show the percentage change from 2015 to 2016 with 2015 as the base year.

 

 

Ex. 194

Ladle Corporation had net income of $2,000,000 in 2014. Using 2014 as the base year, net income decreased by 70% in 2015 and increased by 180% in 2016.

 

Instructions

Compute the net income reported by Ladle Corporation for 2015 and 2016.

 

Ex. 195

The following items were taken from the financial statements of Rug, Inc., over a four-year period:

           Item                       2017             2016               2015               2014  

Net Sales                        $900,000         $650,000         $600,000         $500,000

Cost of Goods Sold       580,000         460,000         420,000         400,000

Gross Profit                   $320,000         $190,000         $180,000         $100,000

 

Instructions

Using horizontal analysis and 2014 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item.

 

 

Ex. 196

The comparative balance sheet of Nathan Company appears below:

NATHAN COMPANY

Comparative Balance Sheet

December 31

———————————————————————————————————————————

Assets                                                                                                              2016              2015 

Current assets ……………………………………………………………………………..        $   420             $333

Plant assets …………………………………………………………………………………             780             567

Total assets …………………………………………………………………………………        $1,200             $900

 

Liabilities and stockholders’ equity

Current liabilities …………………………………………………………………………        $   168             $144

Long-term debt ……………………………………………………………………………             300               162

Common stock …………………………………………………………………………….             432               306

Retained earnings …………………………………………………………………………             300             288

Total liabilities and stockholders’ equity ……………………………………        $1,200             $900

 

Instructions

(a)     Using horizontal analysis, show the percentage change for each balance sheet item using 2015 as a base year.

(b)    Using vertical analysis, prepare a common size comparative balance sheet.

 

 

Ex. 197

Using the following selected items from the comparative balance sheet of Ames Company, illustrate horizontal and vertical analysis.

December 31, 2016          December 31, 2015

Accounts Receivable                  $   960,000                     $   600,000

Inventory                                        975,000                          780,000

Total Assets                                4,000,000                       2,500,000

 

Ex. 198

The comparative condensed balance sheets of Able Corporation are presented below.

ABLE CORPORATION

Comparative Condensed Balance Sheets

December 31

2016                            2015

Assets

Current assets                                                                $ 72,000                     $ 80,000

Property, plant, and equipment (net)                                95,400                         90,000

Intangibles                                                                         33,600                        40,000

Total assets                                                              $201,000                     $210,000

Liabilities and stockholders’ equity

Current liabilities                                                           $ 40,320                     $ 48,000

Long-term liabilities                                                         142,500                       150,000

Stockholders’ equity                                                         18,180                        12,000

Total liabilities and stockholders’ equity                 $201,000                     $210,000

Instructions

(a)   Prepare a horizontal analysis of the balance sheet data for Able Corporation using 2015 as a base.

(b)   Prepare a vertical analysis of the balance sheet data for Able Corporation in columnar form for 2016.

 

 

Ex. 199

The comparative condensed income statements of Marks Corporation are shown below.

MARKS CORPORATION

Comparative Condensed Income Statements

For the Years Ended December 31

   2016                          2015  

Net sales                                                                  $620,000                     $500,000

Cost of goods sold                                                    450,000                     400,000

Gross profit                                                               170,000                       100,000

Operating expenses                                                      54,000                        40,000

Net income                                                               $116,000                     $ 60,000

 

Instructions

(a)   Prepare a horizontal analysis of the income statement data for Marks Corporation using 2015 as a base. (Show the amounts of increase or decrease.)

(b)   Prepare a vertical analysis of the income statement data for Marks Corporation in columnar form for both years.

 

Ex. 201

The following information was taken from the financial statements of Lawson Company:

   2016                  2015  

Gross profit on sales…………………………………………………….          $900,000            $840,000

Income before income taxes……………………………………………            280,000              230,000

Net income…………………………………………………………………..            240,000              216,000

Net income as a percentage of net sales……………………………                    8%                      9%

 

Instructions

(a)     Compute the net sales for each year.

(b)    Compute the cost of goods sold in dollars and as a percentage of net sales for each year.

(c)     Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses).

 

 

Ex. 202

Selected financial statement data for Mure Company are presented below.

December 31, 2016      December 31, 2015

Cash                                                                                     $ 40,000                       $30,000

Short-term investments                                                           20,000                         18,000

Receivables (net)                                                                    100,000                         90,000

Inventories                                                                               80,000                         60,000

Total current liabilities                                                           100,000                         90,000

 

 

Ex. 202            (Cont.)

 

During 2016, net sales were $950,000, and cost of goods sold was $770,000.

 

Instructions

Compute the following ratios at December 31, 2016:

(a)   Current.

(b)   Acid-test.

(c)   Accounts receivable turnover.

(d)   Inventory turnover.

 

 

Ex. 203

Selected information from the comparative financial statements of Fava Company for the year ended December 31, appears below:

   2016                       2015  

Accounts receivable (net)                                     $   180,000               $200,000

Inventory                                                                   140,000                 160,000

Total assets                                                             1,200,000                 800,000

Current liabilities                                                       140,000                 110,000

Long-term debt                                                          400,000                 300,000

Net credit sales                                                       1,330,000                 700,000

Cost of goods sold                                                     900,000                 530,000

Interest expense                                                           50,000                   25,000

Income tax expense                                                      60,000                   29,000

Net income                                                                 150,000                   85,000

 

Instructions

Answer the following questions relating to the year ended December 31, 2016. Show computations.

  1. Inventory turnover for 2016 is __________.
  2. Times interest earned in 2016 is __________.
  3. The debt to assets ratio for 2016 is __________.
  4. Accounts receivable turnover for 2016 is __________.
  5. Return on assets for 2016 is __________.

 

 

Ex. 204

The financial statements of Hainz Company appear below:

 

HAINZ COMPANY

Comparative Balance Sheet

December 31

———————————————————————————————————————————

Assets                                                                                                       2016                  2015  

Cash………………………………………………………………………………………    $ 20,000            $ 40,000

Short-term investments……………………………………………………………        20,000                60,000

Accounts receivable (net)…………………………………………………………        40,000                30,000

Inventory……………………………………………………………………………….        60,000                70,000

Property, plant and equipment (net)………………………………………….    260,000            300,000

Total assets ………………………………………………………………………    $400,000            $500,000

 

Liabilities and stockholders’ equity

Accounts payable……………………………………………………………………    $ 20,000            $ 30,000

Short-term notes payable…………………………………………………………        40,000                90,000

Bonds payable………………………………………………………………………..        80,000              160,000

Common stock………………………………………………………………………..      150,000              150,000

Retained earnings…………………………………………………………………….    110,000               70,000

Total liabilities and stockholders’ equity……………………………….    $400,000            $500,000

 

 


Ex. 204 (cont.)

HAINZ COMPANY

Income Statement

For the Year Ended December 31, 2016

 

Net sales………………………………………………………………………………..                               $400,000

Cost of goods sold…………………………………………………………………..                               250,000

Gross profit……………………………………………………………………………                                 150,000

Expenses

Operating expenses…………………………………………………………….      $42,000

Interest expense…………………………………………………………………        18,000

Total expenses……………………………………………………………..                                 60,000

Income before income taxes………………………………………………………                                   90,000

Income tax expense………………………………………………………………….                                  27,000

Net income……………………………………………………………………………..                               $ 63,000

 

 

Additional information:

  1. Cash dividends of $23,000 were declared and paid in 2016.
  2. Weighted-average number of shares of common stock outstanding during 2016 was 30,000 shares.
  3. Market value of common stock on December 31, 2016, was $21 per share.

 

Instructions

Using the financial statements and additional information, compute the following ratios for Hainz Company for 2016. Show all computations.

Computations

  1. Current ratio _________.
  2. Return on common stockholders’ equity _________.
  3. Price-earnings ratio _________.
  4. Acid-test ratio _________.
  5. Accounts receivable turnover _________.
  6. Times interest earned _________.
  7. Profit margin _________.
  8. Days in inventory _________.
  9. Payout ratio _________.
  10. Return on assets _________.

 

Ex. 205

The following ratios have been computed for Mason Company for 2016.

Profit margin                                               12.5%

Times interest earned                                8 times

Receivables turnover                                 4 times

Acid-test ratio                                                2 : 1

Current ratio                                                  3 : 1

Debt to total assets ratio                               20%

 

Mason Company’s 2016 financial statements with missing information follow:

 

MASON COMPANY

Comparative Balance Sheet

December 31

———————————————————————————————————————————

Assets                                                                                                 2016                     2015  

Cash…………………………………………………………………………………    $ 30,000               $ 45,000

Short-term Investments………………………………………………………        10,000                   25,000

Accounts receivable (net)……………………………………………………             ?        (6)           40,000

Inventory………………………………………………………………………….             ?        (8)           50,000

Property, plant, and equipment (net)……………………………………    200,000               160,000

Total assets………………………………………………………………..     $     ?        (9)       $320,000

 

Liabilities and stockholders’ equity

Accounts payable………………………………………………………………     $     ?        (7)       $ 30,000

Short-term notes payable……………………………………………………        40,000                   35,000

Bonds payable…………………………………………………………………..             ?       (10)          20,000

Common stock…………………………………………………………………..      220,000                 200,000

Retained earnings……………………………………………………………….      60,000                35,000

Total liabilities and stockholders’ equity………………………..     $     ?       (11)      $320,000

 

MASON COMPANY

Income Statement

For the Year Ended December 31, 2016

———————————————————————————————————————————

Net sales…………………………………………………………………………..                            $200,000

Cost of goods sold……………………………………………………………..                              75,000

Gross profit………………………………………………………………………                              125,000

Expenses:

Depreciation expense…………………………………………………….          $     ?                             (5)

Interest expense……………………………………………………………             5,000

Selling expenses……………………………………………………………             8,000

Administrative expenses………………………………………………..         12,000

Total expenses………………………………………………………..                                   ?           (4)

Income before income taxes…………………………………………………                                   ?           (2)

Income tax expense……………………………………………………….                                   ?           (3)

Net income………………………………………………………………………..                            $     ?           (1)

 


Ex. 205            (Cont.)

 

Instructions

Use the above ratios and information from the Mason Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers.

 

 

Ex. 206

Selected data for Irma’s Store appear below.

   2016                     2015    

Net sales                                                                  $800,000               $520,000

Cost of goods sold                                                     600,000                 345,000

Inventory at end of year                                              65,000                   85,000

Accounts receivable at end of year                            140,000                 110,000

 

Instructions

Compute the following for 2016:

(a)     Gross profit rate.

(b)    Inventory turnover.

(c)     Receivables turnover.

 

Ex. 207

Selected financial statement data for Homer Company are presented below.

Net sales                                                               $1,500,000

Cost of goods sold                                                     700,000

Interest expense                                                           10,000

Net income                                                                 205,000

Total assets (ending)                                                $900,000

Total common stockholders’ equity (ending)          $600,000

 

Total assets at the beginning of the year were $800,000; total common stockholders’ equity was $500,000 at the beginning of the period.

 

Instructions

Compute each of the following:

(a)   Asset turnover

(b)   Profit margin

(c)   Return on assets

(d)   Return on common stockholders’ equity

 

 

Ex. 208

Flite Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company’s financial statements.

Beginning inventory                                              $   482,000

Purchases                                                                4,036,000

Ending inventory                                                             ?

Average accounts receivable                                      800,000

Average common stockholders’ equity                   3,500,000

Sales (all on credit)                                                  5,000,000

Net income                                                                 385,000

 

Instructions

Compute the following:

(a)    Accounts receivable turnover and the average collection period.

(b)    Inventory turnover and the days in inventory.

(c)    Return on common stockholders’ equity.

 

 

Ex. 209

Booker Corporation had the following comparative current assets and current liabilities:

Dec. 31, 2016        Dec. 31, 2015

Current assets

Cash                                                                            $ 60,000               $ 30,000

Short-term investments                                                  40,000                   10,000

Accounts receivable                                                        55,000                   95,000

Inventory                                                                      110,000                   90,000

Prepaid expenses                                                           35,000                  20,000

Total current assets                                              $300,000               $245,000

Current liabilities

Accounts payable                                                       $140,000               $110,000

Salaries payable                                                              40,000                   30,000

Income tax payable                                                        20,000                  15,000

Total current liabilities                                          $200,000               $155,000

 

During 2016, credit sales and cost of goods sold were $750,000 and $400,000, respectively.


Ex. 209            (Cont.)

Instructions

Compute the following liquidity measures for 2016:

  1. Current ratio.
  2. Working capital.
  3. Acid-test ratio.
  4. Accounts receivable turnover.
  5. Inventory turnover.

 

 

Ex. 210

Selected data from Decco Company are presented below:

Total assets                                                                    $1,600,000

Average assets                                                                 2,000,000

Net income                                                                          380,000

Net sales                                                                          1,500,000

Average common stockholders’ equity                            1,000,000

 

Instructions

Calculate the profitability ratios that can be computed from the above information.

 

 

Ex. 211

The following data are taken from the financial statements of Dands Company:

 

   2016                     2015     

Monthly average accounts receivable                         $   565,000            $   700,000

Net sales on account                                                   $6,200,000            $7,000,000

Terms for all sales are 2/10, n/30

 

Instructions

(a)    Compute the accounts receivable turnover and the average collection period for both years.

(b)    What conclusion can an analyst draw about the management of the accounts receivable?

 

 

Ex. 212

State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer.

(a)     Collection of an accounts receivable.

(b)    Declaration of cash dividends.

(c)     Additional stock is sold for cash.

(d)    Short-term investments are purchased for cash.

(e)     Equipment is purchased for cash.

(f)     Inventory purchases are made for cash.

(g)     Accounts payable are paid.

 

 

Ex. 213

The balance sheet for Tyde Corporation at the end of the current year indicates the following:

Bonds payable, 6%……………………………………………………….      $4,000,000

5% Preferred stock, $100 par…………………………………………         1,000,000

Common stock, $10 par………………………………………………..         2,000,000

 

Income before income taxes was $480,000 and income taxes expense for the current year amounted to $144,000. Cash dividends paid on common stock were $300,000, and the common stock was selling for $22.88 per share at the end of the year. There were no ownership changes during the year.

Instructions

Determine each of the following:

(a)     Times that bond interest was earned.

(b)    Earnings per share for common stock.

(c)     Price-earnings ratio.

 

 

Ex. 214

The income statement for Pointe Company for the year ended December 31, 2015 appears below.

Sales                                                                $720,000

Cost of goods sold                                          380,000

Gross profit                                                      340,000

Expenses                                                         190,000*

Net income                                                      $150,000

 

*Includes $20,000 of interest expense and $25,000 of income tax expense.

 

Additional information:

  1. Common stock outstanding on January 1, 2015 was 50,000 shares. On July 1, 2015, 10,000 more shares were issued.
  2. The market price of Pointe’s stock was $11.70 at the end of 2015.
  3. Cash dividends of $30,000 were paid, $7,000 of which were paid to preferred stockholders.

 

Instructions

Compute the following ratios for 2015:

(a)    Earnings per share.

(b)    Price-earnings.

(c)    Times interest earned.

 

 

Ex. 215

Selected comparative statement data for Willow Products Company are presented below. All balance sheet data are as of December 31.

   2016                     2015    

Net sales                                                                  $800,000               $720,000

Cost of goods sold                                                     480,000                 440,000

Interest expense                                                             7,000                     5,000

Net income                                                                   60,000                   42,000

Accounts receivable                                                   120,000                 100,000

Inventory                                                                     85,000                   75,000

Total assets                                                                600,000                 500,000

Total common stockholders’ equity                          430,000                 320,000

 

Instructions

Compute the following ratios for 2016:

(a)     Profit margin.

(b)    Asset turnover.

(c)     Return on assets.

(d)    Return on common stockholders’ equity.

 

Ex. 216

Lewis Corporation experienced a fire on December 31, 2016, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances.

December 31, 2016                December 31, 2015

Cash                                                                         $ 30,000                            $ 10,000

Receivables (net)                                                          85,000                              125,000

Inventory                                                                   200,000                              180,000

Accounts payable                                                        50,000                                90,000

Notes payable                                                              30,000                                60,000

Common stock, $100 par                                          400,000                              400,000

Retained earnings                                                       130,000                               101,000

 

Additional information:

  1. The inventory turnover is 4 times
  2. The return on common stockholders’ equity is 20%. The company had no additional paid-in capital.
  3. The accounts receivable turnover is 8.6 times.
  4. The return on assets is 16%.
  5. Total assets at December 31, 2015, were $685,000.

 

Instructions

Compute the following for Lewis Corporation.

(a)     Cost of goods sold for 2016.

(b)    Net sales (credit) for 2016.

(c)     Net income for 2016.

(d)    Total assets at December 31, 2016.

 

 

Ex. 217

For its fiscal year ending December 31, 2015, Conner Corporation reported the following partial data

Income before income taxes                $1,200,000

Income tax expense (30% x 950,000)      285,000

Income before extraordinary items          915,000

Extraordinary loss from flood                  250,000

Net income                                             $665,000

The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.

 

Instructions

 

Prepare a correct income statement, beginning with income before income taxes.

 

Ex. 218

Venti Corporation had income from continuing operations of $420,000 for the year ended December 31, 2015. It also had the following items (before income taxes):

  1. Extraordinary flood loss of $100,000.
  2. Loss of $50,000 on discontinuance of a division.

 

All items are subject to income taxes at a 25% tax rate.

Instructions

Prepare a partial income statement, beginning with income from continuing operations.

 

Ex. 219

Nola Corporation gathered the following information for the fiscal year ended December 31, 2015:

Sales                                                                   $1,300,000

Extraordinary fire loss                                            110,000

Selling and administrative expenses                        160,000

Cost of goods sold                                                  900,000

Loss on sale of equipment                                        40,000

Nola Corporation is subject to a 30% income tax rate.

 

Instructions

Prepare a partial income statement, beginning with income before income taxes.

 

Ex. 220

Greene Corporation had the information listed below available in preparing an income statement for the year ended December 31, 2015. All amounts are before income taxes. Assume a 30% income tax rate for all items.

Sales                                                                                                               $ 800,000

Expropriation of property by a foreign government (loss)                         $ (120,000)

Income from operation of discontinued cement division                               $ 100,000

Loss from disposal of cement division                                                          $ (90,000)

Operating expenses                                                                                        $ 175,000

Gain on sale of equipment                                                                             $   60,000

Cost of goods sold                                                                                         $ 420,000

 

Instructions

Prepare a multiple-step income statement in good form which takes into account intraperiod income tax allocation. Ignore EPS computations.

 


Ex. 221

Indicate whether the following items would be reported as an ordinary or an extraordinary item in Mallak Corporation’s income statement.

(a)    Loss attributable to labor strike.

(b)    Gain on sale of fixed assets.

(c)    Loss from fire. Mallak is a chemical company.

(d)    Loss from sale of short-term investments.

(e)    Expropriation of property by a foreign government.

(f)    Loss from hurricane damage. Mallak Corporation is located in the New Orleans area.

(g)    Loss from government condemnation of property through newly enacted law.

 

 

Ex. 222

Deane Company has income from continuing operations of $520,000 for the year ended December 31, 2015. It also has the following items (before considering income taxes):

(1)    An extraordinary fire loss of $140,000.

(2)    A gain of $80,000 on the discontinuance of a major segment.

(3)    A correction of an error in last year’s financial statement that resulted in a $60,000 overstatement of 2014 net income.

 

Assume all items are subject to income taxes at a 25% tax rate.

 

Instructions

(a)     Prepare an income statement, beginning with income from continuing operations.

(b)    Indicate the statement presentation of any item not included in (a) above.

 

 

COMPLETION STATEMENTS

  1. In analyzing and interpreting financial statement information, three major characteristics are generally evaluated: (1)____________, (2)_____________, and (3)_____________.

 

 

  1. ______________ analysis, also called trend analysis, is a technique for evaluating a percentage increase or decrease for a financial statement item over a period of time.

 

 

  1. Expressing each item within a financial statement as a percentage of a base amount is called ______________ analysis.

 

 

  1. The ratios used in evaluating a company’s liquidity and short-term debt paying ability that complement each other are the ______________ ratio and the ______________ ratio.

 

 

  1. The accounts receivable turnover is calculated by dividing _________________ by average ___________________.

 

 

  1. If inventory turnover is 8 times, and the average inventory was $400,000, the cost of goods sold during the year was $______________ and the days in inventory was ______________ days.

 

 

  1. Stanton Corporation had net income for the year of $200,000 and a profit margin of 20%. If total average assets were $400,000, the asset turnover ratio was ____________ times.

 

 

 

  1. The ______________ ratio measures the percentage of earnings distributed in the form of cash dividends.

 

 

  1. The lower the ______________ to ______________ ratio, the more equity “buffer” there is available to the creditors.

 

 

  1. Times interest earned is calculated by dividing _____________ before _______________ and ________________ by interest expense.

 

 

  1. Discontinued operations refers to the disposal of a ______________ of a business.

 

 

  1. The two criteria necessary for an item to be classified as an extraordinary item are that the transaction or event must be (1) __________________ and (2) ___________________.

 

 

  1. A change in inventory methods during the year would be classified as a change in __________________.

 

MATCHING

SET A

 

  1. For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio.

 

Code:

L     =     Liquidity ratio

P     =     Profitability ratio

S      =     Solvency ratio

 

 

____    1.   Price-earnings ratio

 

____    2.   Asset turnover

 

____    3.   Accounts receivable turnover

 

____    4.   Earnings per share

 

____    5.   Payout ratio

 

____    6.   Current ratio

 

____    7.   Acid-test ratio

 

____    8.   Debt to assets ratio

 

____    9.   Times interest earned

 

____  10.   Inventory turnover

 

Set B

 

  1. Match the ratios with the appropriate ratio computation by entering the appropriate letter in the space provided.

 

  1. Current ratio                                             F.   Times interest earned
  2. Acid-test ratio                                           G.  Inventory turnover
  3. Profit margin                                             H.  Average collection period
  4. Asset turnover                                          I.    Days in inventory
  5. Price-earnings ratio                                   J.   Payout ratio

 

Cost of goods sold

____   1.   —————————

Average inventory

 

Net income

____    2.   —————

Net sales

 

Cash dividends

____    3.   ———————

Net income

 

Net sales

____    4.   ———————

Average assets

 

Current assets

____    5.   ————————

Current liabilities

 

365 days

____    6.   ——————————

Accounts receivable turnover

 

Market price per share of stock

____    7.   ——————————————

Earnings per share

 

 

365 days

____    8.   ————————

Inventory turnover

 

Income before income taxes and interest expense

____    9.   ——————————————————————

Interest expense

 

Cash + short-term investments + receivables (net)

____  10.   ———————————————————————

Current liabilities

 

 

SHORT-ANSWER ESSAY QUESTIONS

S-A E 238

Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies.

 

 

S-A E 239

Harve Reardon, the CEO of Mythic Products, is a successful entrepreneur but a poor student of accounting. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis.

 

S-A E 240

What do the following classes of ratios measure? (a)       Liquidity ratios. (b)          Profitability ratios.
(c)   Solvency ratios.

 

 

S-A E 241

(a)   What is meant by trading on the equity?

(b)   How would you determine the profitability of trading on the equity?

 

S-A E 242

Why is it important to report discontinued operations separately from income from continuing operations?

 

 

S-A E 243    (Ethics)

A trusted employee of Outback Tours was caught in the act of embezzling funds. He confessed to earlier embezzlements, but retracted the confession on the advice of his attorney. Over the course of the most recent quarter, it has been determined that $20,000 was embezzled.

Outback Tours has suffered adverse publicity in the recent past because of serious injury to five tourists that occurred during a two week “Winter Wilds Adventure” tour. The company has therefore decided to avoid publicity and has agreed to drop all charges against the embezzling employee. In return, the employee has agreed to a notation of “Terminated—Not to be Rehired” to be appended to his personnel file.

Required:

  1. Who are the stakeholders in the decision not to prosecute?
  2. Was it ethical for the company to decide not to prosecute? Explain.

 

S-A E 244   (Communication)

Phast Express specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release.

  • The financial statements are being released.
  • Net income this year was $2.12 million. Last year’s net income had been $2.0 million.
  • The current ratio has changed to 2:1 from last year’s 1.4:1
  • The debt/assets ratio has changed to 3:5 from last year’s 2:5
  • The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans.
  • The company is now the largest medical courier in the mid-Atlantic region.

Required:

Prepare a brief press release incorporating the information above. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news.

 

CHALLENGE EXERCISES

CE 1

Stine Company has the following potential transaction involving current assets and current liabilities.

  1. Accounts receivable of $20,000 are collected.
  2. Equipment is purchased for $35,000 cash.
  3. Equipment is purchased by signing a 1-year, 35,000 note.
  4. Paid $6,000 for a 3-year insurance policy.
  5. Paid $16,000 of accounts payable.
  6. Cash dividends of $10,000 are declared.
  7. Borrowed $40,000 by signing a short-term note payable.
  8. Paid a $50,000 short-term note payable.

As of the beginning of the month, current assets were $210,000, and current liabilities were $120,000. Current assets included $45,000 of inventory and $5,000 of prepaid expenses.

 

Instructions

(a)  Compute the current ratio and acid-test ratio as of the beginning of the month.

(b)  Compute the current ratio and acid-test ratio after each transaction. Treat each transaction independently (assume each occurs on the first day of the month, and no other transaction have affected the beginning-of -month balances.

 

CE 2

Nyland Corporation’s comparative balance sheets are presented below.

NYLAND CORPORATION

Balance Sheets

December 31

       2015                     2014

Cash                                                                                  $ 10,300                 $   3,900

Accounts receivable                                                               16,200                     24,400

Inventory                                                                               11,000                       8,000

Land                                                                                       32,000                     28,000

Buildings                                                                                74,000                     74,000

Accumulated depreciation                                                  (15,000)                (12,000)

Total                                                                                  $128,500                 $126,300

Accounts payable                                                             $ 19,370                 $ 31,100

Common stock ($5 par)                                                        70,000                     70,000

Retained earnings                                                                 39,130                   25,200

Total                                                                                  $128,500                 $126,300

 

Mulder’s 2015 income statement included net sales of $150,000, cost of good sold of $90,000, and net income of $24,000. Dividends of $10,070 were paid.

 

Instructions

Compute the following ratios for 2015.

(a)    Current ratio.

(b)    Acid-test ratio

(c)    Accounts Receivable turnover and average collection period.

(d)    Inventory turnover and days in inventory.

(e)    Profit margin.

(f)    Assets turnover.

(g)    Return on assets.

(h)    Return on common stockholders’ equity.

(i)     Earnings per share.

(j)     Payout ratio.

(k)    Debt to assets.

 

 

CE 3

 

For its fiscal year ending October 31, 2015, Dickerson Corporation reports the following partial data.

Income before income taxes                                                    $600,000

Income tax expense (40% ´ $500,000)                                     200,000

Income from continuing operations                                           400,000

         Gain from discontinued operation                                             150,000

Extraordinary loss from flood                                                 (250,000)

Net income                                                                              $300,000

The flood loss is considered an extraordinary item. The income tax rate is 40% on all items.

 

Instructions

(a)    Prepare a correct income statement, beginning with income before income taxes.

(b)    Explain in memo form why the income statement data are misleading.