ACC 557 Midterm Exam – NEW

ACC 557 Midterm Exam – Strayer New

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Chapter 1 Through 8

CHAPTER 1

ACCOUNTING IN ACTION

CHAPTER LEARNING OBJECTIVES
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles.
5. Explain the monetary unit assumption and the economic entity assumption.
6. State the accounting equation, and define its components
7. Analyze the effects of business transactions on the accounting equation.
8. Understand the four financial statements and how they are prepared.
a9. Explain the career opportunities in accounting.

TRUE-FALSE STATEMENTS
1. Owners of business firms are the only people who need accounting information.

2. Transactions that can be measured in dollars and cents are recorded in the financial information system.

3. The hiring of a new company president is an economic event recorded by the financial information system.

4. Management of a business enterprise is the major external user of information.

5. Accounting communicates financial information about a business enterprise to both internal and external users.

6. Accounting information is used only by external users with a financial interest in a business enterprise.

7. Financial statements are the major means of communicating accounting information to interested parties.

8. Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process.

9. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.

10. The study of accounting will be useful only if a student is interested in working for a profit-oriented business firm.

11. Private accountants are accountants who are not employees of business enterprises.

12. The study of accounting is not useful for a business career unless your career objective is to become an accountant.

13. A working knowledge of accounting is not relevant to a lawyer or an architect.

14. Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CPAs.

15. Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information.

16. The primary accounting standard-setting body in the United States is the International Accounting Standards Board.

17. The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.

18. The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies.

19. The cost and fair value of an asset are the same at the time of acquisition and in all subsequent periods.

20. Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners.

21. A partnership must have more than one owner.

22. The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.

23. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

24. In order to possess future service potential, an asset must have physical substance.

25. Owners’ claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses.

26. The basic accounting equation states that Assets = Liabilities.

27. Accountants record both internal and external transactions.

28. Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company.

29. The purchase of store equipment for cash reduces stockholders’ equity by an equal amount.

30. The purchase of office equipment on credit increases total assets and total liabilities.

31. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period.

32. Net income for the period is determined by subtracting total expenses and drawings from total revenues.

33. The income statement is sometimes referred to as the statement of operations.

34. A balance sheet reports the assets and liabilities of a company for a specific period of time.

35. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet.

36. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.

37. Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation.

38. Accountants do not have to worry about issues of ethics.

39. At the time an asset is acquired, cost and fair value should be the same.

40. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.

41. The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.

42. External transactions involve economic events between the company and some other enterprise or party.

43. In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss).

MULTIPLE CHOICE QUESTIONS
44. Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.

45. The process of recording transactions has become more efficient because
a. fewer events can be quantified in financial terms.
b. computers are used in processing business events.
c. more people have been hired to record business transactions.
d. business events are recorded only at the end of the year.

46. Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.

47. Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction?
a. The appointment of a new CPA firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.

48. The use of computers in recording business events
a. has made the recording process more efficient.
b. does not use the same principles as manual accounting systems.
c. has greatly impacted the identification stage of the accounting process.
d. is economical only for large businesses.

49. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording nonquantifiable economic events.
d. analyzing and interpreting financial reports.

50. The accounting process is correctly sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.

51. Which of the following techniques are not used by accountants to interpret and report financial information?
a. Graphs.
b. Special memos for each class of external users.
c. Charts.
d. Ratios.

52. Accounting consists of three basic activities which are related to economic events of an organization. These include
a. identifying, recording, and communicating
b. identifying, calculating, and responding
c. classifying, numbering, and reporting
d. issuing, reporting, and classifying

53. All of the following statements are correct except
a. Good decision-making depends on good information.
b. A vital element in communicating economic events is the accountant’s ability to analyze and interpret reported information.
c. The origins of accounting are generally attributed to Socrates, a classical Greek philosopher, who promoted accounting as a social contract.
d. The information that a user of financial information needs depends upon the kinds of decisions the user makes.

54. Which of the following would not be considered an internal user of accounting data for the GHI Company?
a. President of the company.
b. Production manager.
c. Merchandise inventory clerk.
d. President of the employees’ labor union.

55. Which of the following would not be considered an external user of accounting data for the GHI Company?
a. Internal Revenue Service Agent.
b. Management.
c. Creditors.
d. Customers.

56. Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company.
b. The controller of a company.
c. Creditors of a company.
d. Salesmen of the company.

57. Which of the following is an external user of accounting information?
a. Labor unions.
b. Finance directors.
c. Company officers.
d. Managers.

58. Which one of the following is not an external user of accounting information?
a. Regulatory agencies.
b. Customers.
c. Investors.
d. All of these are external users.

59. Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the accounting process?
a. Identification.
b. Communication.
c. Recording.
d. Analysis.

60. The origins of accounting are generally attributed to the work of
a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.

61. Financial accounting provides economic and financial information for all of the following except
a. creditors.
b. investors.
c. managers.
d. other external users.

62. The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.

63. The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.

64. Ethics are the standards of conduct by which one’s actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. All of these answers are correct.

65. All of the following are steps in analyzing ethics cases in financial reporting except
a. identify and analyze the principle elements in the situation.
b. contact law enforcement regarding any violations of corporate ethics codes
c. identify the alternatives and weigh the impact of each alternative on various stakeholders.
d. recognize an ethical situation and the ethical issues involved.

66. In order to increase comparability, in recent years, the FASB and IASB have made efforts to reduce the differences between U.S.GAAP and IFRS through a process known as
a. convergence
b. monetary unit assumption
c. the cost principle
d. the fair value principle

67. Martin Corporation purchased land in 2007 for $290,000. In 2015, it purchased a nearly identical parcel of land for $460,000. In its 2015 balance sheet, Martin valued these two parcels of land at a combined value of $920,000. By reporting the land in this manner, Martin Corp. has violated the
a. historical cost principle
b. convergence
c. economic entity assumption
d. monetary unit assumption

68. Andre Dickinson, owner of Andre’s Fine Wines, also owns a personal residence that costs $475,000. The market value of his residence is $625,000. During preparation of the financial statements for Andre’s Fine Wines, the accounting concept most relevant to the presentation of Andre’s home is
a. the economic entity assumption.
b. the fair value principle.
c. the monetary unit assumption.
d. convergence.

69. Generally accepted accounting principles are
a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.

70. The historical cost principle requires that when assets are acquired, they be recorded at
a. appraisal value.
b. cost.
c. market price.
d. book value.

71. The cost of an asset and its fair value are
a. never the same.
b. the same when the asset is sold.
c. irrelevant when the asset is used by the business in its operations.
d. the same on the date of acquisition.

72. The body of theory underlying accounting is not based on
a. physical laws of nature.
b. concepts.
c. principles.
d. definitions.

73. The private sector organization involved in developing accounting principles is the
a. Feasible Accounting Standards Body.
b. Financial Accounting Studies Board.
c. Financial Accounting Standards Board.
d. Financial Auditors’ Standards Body.

74. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.

75. GAAP stands for
a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

76. Financial information that is capable of making a difference in a decision is
a. faithfully representative.
b. relevant.
c. convergent.
d. generally accepted.

77. The Duce Company has five plants nationwide that cost a total of $100 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.

78. The fair value principle is applied for
a. all assets.
b. current assets.
c. buildings.
d. investment securities.

79. The proprietorship form of business organization
a. must have at least three owners in most states.
b. represents the largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and the owner.

80. The economic entity assumption requires that the activities
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of an entity be kept separate from the activities of its owner.

81. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. terminates when one of its original stockholders dies.

82. The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.

83. Which of the following is not an advantage of the corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life

84. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.

85. John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.

86. Which of the following is true regarding the corporate form of business organization?
a. Corporations are the most prevalent form of business organization.
b. Corporate businesses are generally smaller in size than partnerships and proprietor-ships.
c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships.
d. Corporations are separate legal entities organized exclusively under federal law.

87. A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the
a. stand alone concept.
b. monetary unit assumption.
c. corporate form of ownership.
d. economic entity assumption.

88. Ted Leo is the proprietor (owner) of Ted’s, a retailer of golf apparel. When recording the financial transactions of Ted’s, Ted does not record an entry for a car he purchased for personal use. Ted took out a personal loan to pay for the car. What accounting concept guides Ted’s behavior in this situation?
a. Pay back concept
b. Economic entity assumption
c. Cash basis concept
d. Monetary unit assumption

89. A basic assumption of accounting assumes that the dollar is
a. unrelated to business transactions.
b. a poor measure of economic activities.
c. the common unit of measure for all business transactions.
d. useless in measuring an economic event.

90. The assumption that the unit of measure remains sufficiently constant over time is part of the
a. economic entity assumption.
b. cost principle.
c. historical cost principle.
d. monetary unit assumption.

91. Owners enjoy limited liability in a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

92. A problem with the monetary unit assumption is that
a. the dollar has not been stable over time.
b. the dollar has been stable over time.
c. the dollar is a common medium of exchange.
d. it is impossible to account for international transactions.

93. The common characteristic possessed by all assets is
a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit.

94. Owner’s equity is best depicted by the following:
a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets – Liabilities.

95. The basic accounting equation may be expressed as
a. Assets = Equities.
b. Assets – Liabilities = Stockholders’ Equity.
c. Assets = Liabilities + Stockholders’ Equity.
d. All of these answers are correct.

96. Liabilities
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.

97. Liabilities of a company would not include
a. notes payable.
b. accounts payable.
c. salaries and wages payable.
d. cash.

98. Liabilities of a company are owed to
a. debtors.
b. benefactors.
c. creditors.
d. underwriters.

99. Stockholders’ equity can be described as
a. creditorship claim on total assets.
b. ownership claim on total assets.
c. benefactor’s claim on total assets.
d. debtor claim on total assets.

100. Stockholders’ equity is often referred to as
a. residual equity.
b. leftovers.
c. spoils.
d. second equity.

101. When assets are distributed to the owners of a corporation, these distributions are termed
a. depletions.
b. consumptions.
c. dividends.
d. a credit line.

102. A dividend is
a. a distribution of the company’s earnings to its stockholders.
b. equal to liabilities minus stockholders’ equity.
c. equal to assets minus stockholders’ equity.
d. equal to revenues less expenses

103. Revenues would not result from
a. sale of merchandise.
b. issuance of common stock.
c. performance of services.
d. rental of property.

104. Sources of increases to stockholder’s equity are
a. additional investments by owners.
b. purchases of merchandise.
c. dividends.
d. expenses.

105. The basic accounting equation cannot be restated as
a. Assets – Liabilities = Stockholders’ Equity.
b. Assets – Stockholders’ Equity = Liabilities.
c. Stockholders’ Equity + Liabilities = Assets.
d. Assets + Liabilities = Stockholders’ Equity.

106. Stockholders’ equity is decreased by all of the following except
a. sales of stock.
b. net losses.
c. expenses.
d. dividends.

107. A net loss will result during a time period when
a. liabilities exceed assets.
b. dividends exceed investments.
c. expenses exceed revenues.
d. revenues exceed expenses.

108. If total liabilities increased by $30,000 and stockholders’ equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase

109. If total liabilities decreased by $30,000 and stockholders’ equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase

110. If total liabilities decreased by $50,000 and stockholders’ equity increased by $30,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $80,000 decrease
b. $20,000 decrease
c. $20,000 increase
d. $80,000 increase

111. If total liabilities decreased by $30,000 and stockholders’ equity decreased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase

112. If total liabilities increased by $25,000 during a period of time and stockholders’ equity decreased by $9,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
a. $34,000 decrease.
b. $16,000 decrease.
c. $16,000 increase.
d. $34,000 increase.

113. If total assets equal $345,000 and total stockholders’ equity equal $140,000, then total liabilities must equal
a. $485,000.
b. $205,000.
c. $140,000.
d. There is not enough information given to determine this.

114. Which of the following will not cause a change in the stockholders’ equity of a business?
a. An increase in prepaid expenses.
b. An increase in retained earnings.
c. The sale of common stock.
d. The declaration and payment of dividends.

115. The amount of stockholders’ equity in a business is not affected by
a. The percentage of total assets held in cash.
b. Assets consumed in the process of earning revenues.
c. The profitability of the business.
d. The amount of dividends declared and paid to stockholders.

116. If the transaction causes an asset account to decrease, which of the following related effects may occur?
a. An increase of equal amount in the common stock account.
b. An increase in a liability account.
c. An increase of equal amount in another asset account.
d. An increase in the combined total of liabilities and stockholders’ equity.

117. The accounting equation for Quattro Enterprises is as follows:
Assets Liabilities Stockholders’ Equity
$120,000 = $60,000 + $60,000
If Quattro purchases office equipment on account for $25,000, the accounting equation will change to
Assets Liabilties Stockholders’ Equity
a. $120,000 = $60,000 + $60,000
b. $145,000 = $60,000 + $85,000
c. $145,000 = $72,500 + $72,500
d. $145,000 = $85,000 + $60,000

118. As of June 30, 2015, Actual Tigers Company has assets of $100,000 and stockholders’ equity of $40,000. What are the liabilities for Actual Tigers Company as of June 30, 2015?
a. $40,000
b. $60,000
c. $100,000
d. $140,000

119. Stockholders’ equity is increased by
a. dividends.
b. revenues.
c. expenses.
d. liabilities.

120. Stockholders’ equity is decreased by
a. assets.
b. revenues.
c. expenses.
d. liabilities.

121. If total liabilities increased by $8,000, then
a. assets must have decreased by $8,000.
b. stockholders’ equity must have increased by $8,000.
c. assets must have increased by $8,000, or stockholders’ equity must have decreased by $8,000.
d. assets and stockholders’ equity each increased by $4,000.

122. Collection of a $1,000 Accounts Receivable
a. increases an asset $1,000; decreases an asset $1,000.
b. increases an asset $1,000; decreases a liability $1,000.
c. decreases a liability $1,000; increases stockholders’ equity $1,000.
d. decreases an asset $1,000; decreases a liability $1,000.

123. Revenues are
a. the cost of assets consumed during the period.
b. gross increases in stockholders’ equity resulting from business activities.
c. the cost of services used during the period.
d. actual or expected cash outflows.

124. If an individual asset is increased, then
a. there must be an equal decrease in a specific liability.
b. there must be an equal decrease in stockholders’ equity.
c. there must be an equal decrease in another asset.
d. All of these answers are possible.

125. If services are rendered for credit, then
a. assets will decrease.
b. liabilities will increase.
c. stockholders’ equity will increase.
d. liabilities will decrease.

126. If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. stockholders’ equity will increase.
d. assets will decrease.

127. If a corporation distributes cash to its stockholders, then
a. there has been a violation of accounting principles.
b. stockholders’ equity will increase.
c. stockholders’ equity will decrease.
d. there will be a new liability showing the stockholders owes money to the business.

128. If supplies that have been purchased are used in the course of business, then
a. a liability will increase.
b. an asset will increase.
c. stockholders’ equity will decrease.
d. stockholders’ equity will increase.

129. As of December 31, 2015, Calexico Company has assets of $42,000 and stockholders’ equity of $20,000. What are the liabilities for Calexico Company as of December 31, 2015?
a. $22,000.
b. $20,000.
c. $42,000.
d. $62,000.

130. Which of the following events is not a business transaction?
a. Issuance of stock in exchange for cash.
b. Hired employees.
c. Incurred utility expenses for the month.
d. Earned revenue for services provided.

131. Net income results when
a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.

132. Retained earnings at the end of the period is equal to
a. retained earnings at the beginning of the period plus net income minus liabilities.
b. retained earnings at the beginning of the period plus net income minus dividends.
c. net income.
d. assets plus liabilities.

133. A balance sheet shows
a. revenues, liabilities, and stockholders’ equity.
b. expenses, dividends, and stockholders’ equity.
c. revenues, expenses, and dividends.
d. assets, liabilities, and stockholders’ equity.

134. An income statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

135. If the retained earnings account increases from the beginning of the year to the end of the year, then
a. net income is less than dividends.
b. a net loss is less than dividends.
c. the company must have sold stock.
d. net income is greater than dividends.

136. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of $200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000 in expenses, and Mofro paid dividends of $50,000. Stockholders’ equity at the end of the year was
a. $200,000.
b. $100,000.
c. $250,000.
d. $300,000.

137. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of $200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000 in expenses, and Mofro paid dividends of $50,000. The net income reported by Mofro’s Computer Repair Shop for the year was
a. $100,000.
b. $150,000.
c. $200,000.
d. $250,000.

138. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of $200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000 in expenses, and Mofro paid dividends of $50,000. Mofro’s stockholders’ equity changed by what amount from the beginning of the year to the end of the year?
a. $100,000.
b. $150,000.
c. $200,000.
d. $250,000.

139. The balance sheet is frequently referred to as
a. an operating statement.
b. the statement of financial position.
c. the statement of cash flows.
d. the statement of retained earnings.

140. The primary purpose of the statement of cash flows is to report
a. a company’s investing transactions.
b. a company’s financing transactions.
c. information about cash receipts and cash payments of a company.
d. the net increase or decrease in cash.

141. All of the financial statements are for a period of time except the
a. income statement.
b. retained earnings statement.
c. balance sheet.
d. statement of cash flows.

142. The ending retained earnings amount is shown on
a. the balance sheet only.
b. the retained earnings statement only.
c. both the income statement and the retained earnings statement.
d. both the balance sheet and the retained earnings statement.

143. Black Keys Company began the year with stockholders’ equity of $280,000. During the year, the company recorded revenues of $375,000, expenses of $285,000, and paid dividends of $30,000. What was Black Keys’ stockholders’ equity at the end of the year?
a. $280,000.
b. $340,000.
c. $370,000.
d. $400,000.

144. Kennedy Company issued stock to Ed Kennedy in exchange for his investment of $75,000 cash in the business. The company recorded revenues of $555,000, expenses of $420,000, and had paid dividends of $30,000. What was Kennedy’s net income for the year?
a. $105,000.
b. $135,000.
c. $165,000.
d. $180,000.

145. Centro-matic Company began the year with stockholders’ equity of $30,000. During the year, Centro-matic issued additional shares of stock in exchange for cash of $42,000, recorded expenses of $120,000, and paid dividends of $8,000. If Centro-matic’s ending stockholders’ equity was $112,000, what was the company’s revenue for the year?
a. $160,000.
b. $168,000.
c. $202,000.
d. $210,000.

146. Barsuk Company began the year with stockholders’ equity of $108,000. During the year, Barsuk issued stock for $147,000, recorded expenses of $420,000, and paid dividends of $28,000. If Barsuk’s ending stockholders’ equity was $290,000, what was the company’s revenue for the year?
a. $455,000.
b. $483,000.
c. $602,000.
d. $630,000.

147. Fat Possum’s Service Shop started the year with total assets of $330,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $420,000 in expenses, and paid dividends of $60,000.
Stockholders’ equity at the end of the year was
a. $90,000.
b. $240,000.
c. $300,000.
d. $360,000.

148. Fat Possum’s Service Shop started the year with total assets of $330,000 and total liabilities of $2400,000. During the year, the business recorded $630,000 in revenues, $420,000 in expenses, and paid dividends of $60,000.
The net income reported by Fat Possum’s Service Shop for the year was
a. $150,000.
b. $210,000.
c. $240,000.
d. $270,000.

149. Misra Company compiled the following financial information as of December 31, 2015:
Revenues $340,000
Retained earnings (1/1/15) 60,000
Equipment 80,000
Expenses 250,000
Cash 90,000
Dividends 20,000
Supplies 10,000
Accounts payable 40,000
Accounts receivable 70,000
Common stock 80,000

Misra’s assets on December 31, 2015 are
a. $180,000.
b. $250,000.
c. $360,000.
d $490,000.

150. Misra Company compiled the following financial information as of December 31, 2015:
Revenues $340,000
Retained earnings (1/1/15) 60,000
Equipment 80,000
Expenses 250,000
Cash 90,000
Dividends 20,000
Supplies 10,000
Accounts payable 40,000
Accounts receivable 70,000
Common stock 80,000

Misra’s stockholders’ equity on December 31, 2015 is
a. $90,000.
b. $140,000.
c. $210,000.
d. $250,000.

151. Teamboo Company’s stockholders’ equity at the beginning of August 2015 was $750,000. During the month, the company earned net income of $175,000 and paid dividends of $75,000. At the end of August 2015, what is the amount of stockholders’ equity?
a. $675,000
b. $750,000
c. $825,000
d. $850,000

152. On January 1, 2015, Cat Power Company reported stockholders’ equity of $705,000. During the year, the company paid dividends of $30,000. At December 31, 2015, the amount of stockholders’ equity was $825,000. What amount of net income or net loss would the company report for 2015?
a. Net loss of $30,000
b. Net income of $90,000
c. Net income of $120,000
d. Net income of $150,000

153. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl issued stock of $9,000 and paid dividends of $15,000 during the year. The stockholders’ equity at the end of the year was
a. $33,000.
b. $54,000.
c. $57,000.
d. $63,000.

154. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl issued stock of $9,000 and paid dividends of $15,000 during the year. The net income reported by Stahl Consulting for the year was:
a. $3,000.
b. $12,000.
c. $18,000.
d. $27,000.

155. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl issued stock of $9,000 and paid dividends of $15,000 during the year. Stockholders’ equity changed by what amount from the beginning of the year to the end of the year?
a. $3,000.
b. $9,000.
c. $12,000.
d. $45,000.

156. During the year 2015, Dilego Company earned revenues of $90,000, had expenses of $56,000, purchased assets with a cost of $10,000 and paid dividends of $6,000. Net income for the year is
a. $18,000.
b. $24,000.
c. $28,000.
d. $34,000.

157. At October 1, Arcade Fire Enterprises reported stockholders’ equity of $70,000. During October, no stock was issued and the company earned net income of $18,000. If stockholders’ equity at October 31 totals $78,000, what amount of dividends were paid during the month?
a. $0
b. $8,000
c. $10,000
d. $26,000

158. At October 1, Arcade Fire Enterprises reported stockholders’ equity of $72,000. During October, no stock was issued and the company posted a net loss of $8,000. If stockholders’ equity at October 31 totals $64,000, what amount of dividends were paid during the month?
a. $0
b. $4,000
c. $8,000
d. $16,000

159. At October 1, Arcade Fire Enterprises reported stockholders’ equity of $70,000. During October, common stock of $4,000 was issued and the company earned net income of $14,000. If stockholders’ equity at October 31 totals $80,000, what amount of dividends were paid during the month?
a. $0
b. $4,000
c. $8,000
d. $10,000

160. At October 1, Arcade Fire Enterprises reported stockholders’ equity of $70,000. During October, common stock of $10,000 was issued and the company posted a net loss of $4,000. If stockholders’ equity at October 31 totals $70,000, what amount of dividends were paid during the month?
a. $0
b. $4,000
c. $6,000
d. $10,000

a161. All of the following are services offered by public accountants except
a. budgeting.
b. auditing.
c. tax planning.
d. consulting.

a162. Which list below best describes the major services performed by public accountants?
a. Bookkeeping, mergers, budgets.
b. Employee training, auditing, bookkeeping.
c. Auditing, taxation, management consulting.
d. Cost accounting, production scheduling, recruiting.

a163. Preparing tax returns and engaging in tax planning is performed by
a. public accountants only.
b. private accountants only.
c. both public and private accountants.
d. IRS accountants only.

a164. A private accountant can perform many activities in a business organization but would not work in
a. budgeting.
b. accounting information systems.
c. external auditing.
d. tax accounting.

165. Which of the following is not part of the accounting process?
a. Recording
b. Identifying
c. Financial decision making
d. Communicating

166. The first part of the accounting process is
a. communicating.
b. identifying.
c. processing.
d. recording.

167. Keeping a systematic, chronological diary of events that are measured in dollars and cents is called
a. communicating.
b. identifying.
c. processing.
d. recording.

168. Auditing is
a. the examination of financial statements by a CPA in order to express an opinion on their fairness.
b. a part of accounting that involves only recording of economic events.
c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems.
d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presented fairly.

169. Internal users of accounting information include all of the following except
a. company officers.
b. investors.
c. marketing managers.
d. production supervisors.

170. The organization(s) primarily responsible for establishing generally accepted accounting principles is(are) the
FASB SEC
a. no no
b. yes no
c. no yes
d. yes yes

171. The primary accounting standard-setting body in the United States is the
a. Financial Accounting Standards Board.
b. International Accounting Standards Board.
c. Internal Revenue Service.
d. Securities and Exchange Commission.

172. A proprietorship is a business
a. owned by one person.
b. owned by two or more persons.
c. organized as a separate legal entity under state corporation law.
d. owned by a governmental agency.

173. A net loss will result during a time period when
a. assets exceed liabilities.
b. assets exceed stockholders’ equity.
c. expenses exceed revenues.
d. revenues exceed expenses.

174. Bright Eyes Downtown Diner received a bill of $600 from the Jronand Wine Advertising Agency. The owner, A. A. Bondy, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is
a. a decrease in Cash and an increase in Accounts Payable.
b. a decrease in Cash and an increase in Retained Earnings.
c. an increase in Accounts Payable and a decrease in Retained Earnings.
d. a decrease in Accounts Payable and an increase in Retained Earnings.

175. Matador Company purchases $1,300 of equipment from Danger Mouse Inc. for cash. The effect on the components of the basic accounting equation of Matador Company is
a. an increase in assets and liabilities.
b. a decrease in assets and liabilities.
c. no change in total assets.
d. an increase in assets and a decrease in liabilities.

176. Druganaut Company buys a $21,000 van on credit. The transaction will affect the
a. income statement only.
b. balance sheet only.
c. income statement and retained earnings statement only.
d. income statement, retained earnings statement, and balance sheet.

177. The financial statement that summarizes the financial position of a company is the
a. income statement.
b. balance sheet.
c. operating statement.
d. retained earnings statement.

178. Which of the following is not a reason one set of international accounting standards are needed?
a. multinational corporations.
b. mergers and acquisitions.
c. information technology.
d. all of these answer choices are correct.

179. Which of the following is not a reason one set of international accounting standards are needed?
a. multinational corporations.
b. financial markets.
c. information technology.
d. all of the above are reasons one set of international accounting standards are needed.

180. International standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

181. U.S. standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

182. International standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

183. U.S. standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

184. The United States and the international standard-setting environment are primarily driven by meeting the needs of
a. investors and creditors.
b. tax authorities.
c. central government planners.
d. academic researchers.

185. The internal control standards applicable to Sarbanes-Oxley apply to
a. all U.S. and international companies.
b. U.S. and international companies listed on U.S. exchanges.
c. International companies listed on U.S. exchanges.
d. U.S. companies listed on U.S. exchanges.

186. The concern about international companies adopting SOX-type standards centers on
a. cost-benefit analysis.
b. ethics issues.
c. the governing authorities.
d. comparability.

187. Financial accounting ethics violations are
a. not a problem in the U.S. or internationally.
b. much more common in the U.S. than internationally.
c. much more common internationally than in the U.S.
d. a major problem both in the U.S. and internationally.

188. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.

189. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosure requirements.

190. Proprietorships, partnerships, and corporations
a. are the three most common forms of business organizations in the U.S.
b. are the three most common forms of business organizations internationally.
c. are used in different proportions in different countries.
d. all of these answers are correct.

191. The conceptual framework that underlies IFRS
a. is very similar to that used to develop GAAP.
b. does not define assets or liabilities.
c. does not define equity.
d. does not define income or expenses.

BRIEF EXERCISES

BE 192
Match the following external users of financial accounting information with the type of decision that user will make with the information.

a. Creditor
b. Investor
c. Regulatory Agency
d Internal Revenue Service

_______ (1) Is the company operating within prescribed guidelines?

_______ (2) Is the company complying with tax laws?

_______ (3) Is the company able to pay its debts?

_______ (4) Is the company a good investment?

BE 193
Match the following terms and definitions.

a. Accounts receivable c. Accounts payable
b. Creditor d. Note payable

_______ (1) Amounts due from customers
_______ (2) Amounts owed to suppliers for goods and services purchased
_______ (3) Amounts owed to bank
_______ (4) Party to whom money is owed

BE 194
Indicate which of these items is an asset (A), liability (L) or stockholders’ equity (SE) account.
_______ (1) Supplies
_______ (2) Dividends
_______ (3) Buildings
_______ (4) Notes Payable
_______ (5) Salaries and Wages Payable

BE 195
Use the accounting equation to answer the following questions.
1. Picaresque Sails Co. has total assets of $140,000 and total liabilities of $45,000. What is stockholders’ equity?
2. The Natenal Fun Center has total assets of $225,000 and stockholders’ equity of $100,000. What are total liabilities?
3. Okkervil River Restaurant has total liabilities of $50,000 and stockholders’ equity of $100,000. What are total assets?

BE 196
Determine the missing items.

Assets = Liabilities + Stockholders’ Equity
$85,000 $52,000 (a)
(b) $28,000 $34,000
$84,000 (c) $50,000

BE 197
Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE).

_____ 1. Accounts receivable
_____ 2. Accounts payable
_____ 3. Common stock
_____ 4. Supplies
_____ 5. Utilities expense
_____ 6. Cash
_____ 7. Notes payable
_____ 8. Equipment

BE 198
Identify the impact on the accounting equation of each of the following transactions.
1. Purchase office supplies on account.
2. Paid secretary weekly salary.
3. Purchased office furniture for cash.
4. Received monthly utility bill to be paid at later time.

BE 199
Balance sheet amounts as of December 31, 2015 for Matt Pond’s Tutoring Service are listed below. Prepare a balance sheet in good form.
Accounts Payable $ 400
Accounts Receivable 1,000
Cash 300
Common Stock ?

BE 200
Identify whether the following items would be reported on the income statement (IS) or balance sheet (BS).
1. Cash
2. Service Revenue
3. Notes Payable
4. Interest Expense
5. Accounts Receivable

BE 201
Use the following information to calculate for the year ended December 31, 2015 (a) net income, (b) ending retained earnings, and (c) total assets.

Supplies $ 3,000 Revenues $25,000
Operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Dividends 1,000
Accounts receivable 3,000 Notes payable 1,000
Beginning retained earnings 5,000 Equipment 6,000

BE 202
Listed below in alphabetical order are the balance sheet items of Madjack Company at December 31, 2015. Prepare a balance sheet and include a complete heading.
Accounts payable $ 21,000
Accounts receivable 15,000
Buildings 91,000
Cash 6,000
Common stock 108,000
Equipment 17,000

EXERCISES
Ex. 203
Below is a list of important abbreviations widely used in business. For each abbreviation give the full designation.

1. CPA

2. IRS

3. FBI

4. FASB

5. GAAP

6. SEC

Ex. 204
Determine the missing amount for each of the following. Assets = Liabilities + Stockholders’ Equity
1. (a) $55,000 $95,000 2. $125,000 (b) $85,000 3. $160,000 $65,000 (c)

Ex. 205
For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or stockholders’ equity item.
Code
Asset A
Liability L
Stockholders’ Equity SE

1. Rent Expense 6. Cash

2. Equipment 7. Accounts Receivable

3. Accounts Payable 8. Dividends

4. Common Stock 9. Service Revenue

5. Insurance Expense 10. Notes Payable

Ex. 206
At the beginning of the year, Shaolin Company had total assets of $520,000 and total liabilities of $210,000. Answer the following questions viewing each situation as being independent of the others.
(1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of stockholders’ equity at the end of the year?
(2) During the year, total liabilities increased $230,000 and stockholders’ equity decreased $90,000. What is the amount of total assets at the end of the year?
(3) If total assets decreased $40,000 and stockholders’ equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?

Ex. 207
Magnolia Electric Car Cleaning has the following accounts:
Equipment Notes Payable
Accounts Payable Common Stock
Cash Dividends
Supplies
Accounts Receivable

Identify which items are (1) Assets
(2) Liabilities
(3) Stockholders Equity

Ex. 208
On June 1, 2015, Secretly Canadian Company prepared a balance sheet that shows the following:
Assets (no cash) $100,000
Liabilities 45,000
Stockholders’ Equity 55,000

Ex. 208 (cont.)
Shortly thereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases?

Cash Received for Balances Immediately After Sale
the Assets Assets – Liabilities = Stockholders’ Equity
Cash A $110,000 $________ $________ $________

Cash B 100,000 ________ ________ ________

Cash C 90,000 ________ ________ ________

Ex. 209
At the beginning of 2015, Hold Steady Company had total assets of $520,000 and total liabilities of $250,000. Answer each of the following questions.
1. If total assets increased $60,000 and stockholders’ equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year.
2. During the year, total liabilities decreased $75,000 and stockholders’ equity increased $50,000. Compute the amount of total assets at the end of the year.
3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of stockholders’ equity at the end of the year.

Ex. 210
Compute the missing amount in each category of the accounting equation.
Assets Liabilities Stockholders’ Equity
(a) $319,000 $ ? $143,000
(b) $223,000 $ 79,000 $ ?
(c) $ ? $233,000 $325,000

Ex. 211
From the following list of selected accounts taken from the records of Ward Homeopathic Center, identify those that would appear on the balance sheet.
a. Common Stock f. Accounts Payable
b. Service Revenue g. Cash
c. Land h. Rent Expense
d. Salaries and Wages Expense i. Supplies
e. Notes Payable j. Utilities Expense

Ex. 212
Selected transactions for Mountain Goats Tree Service are listed below.
1. Sold common stock for cash to start business.
2. Paid for monthly advertising.
3. Purchased supplies on account.
4. Billed customers for services performed.
5. Paid cash dividends.
6. Received cash from customers billed in (4).
7. Incurred utilities expense on account.
8. Purchased additional supplies for cash.
9. Received cash from customers when service was performed.

Instructions
List the numbers of the above transactions and describe the effect of each transaction on assets,
liabilities, and stockholders’ equity. For example, the first answer is: (1) Increase in assets and increase in stockholders’ equity.

Ex. 213
Wilco Legal Eagles Company entered into the following transactions during
March 2015.
1. Purchased office equipment for $23,000 from Business Equipment, Inc. on account.
2. Paid $3,000 cash for March rent on office furniture.
3. Received $15,000 cash from customers for legal work billed in February.
4. Provided legal services to Amy Construction Company for $3,500 cash.
5. Paid Northern States Power Co. $2,700 cash for electric usage in March.
6. Stockholders’ invested an additional $32,000 in the business.
7. Paid Business Equipment, Inc. for the office equipment purchased in (1) above.
8. Incurred advertising expense for March of $1,900 on account.

Instructions
Indicate with the appropriate letter whether each of the transactions above results in:
(a) an increase in assets and a decrease in assets.
(b) an increase in assets and an increase in stockholders’ equity.
(c) an increase in assets and an increase in liabilities.
(d) a decrease in assets and a decrease in stockholders’ equity.
(e) a decrease in assets and a decrease in liabilities.
(f) an increase in liabilities and a decrease in stockholders’ equity.
(g) an increase in stockholders’ equity and a decrease in liabilities.

Ex. 214
Two items are omitted from each of the following summaries of balance sheet and income
statement data for two proprietorships for the year 2015, Holly Enterprises and Cat Stevens.

Holly Enterprises Cat Stevens
Beginning of year:
Total assets $ 98,000 $129,000
Total liabilities 60,000 (c)
Total stockholders’ equity (a) 85,000
End of year:
Total assets 160,000 180,000
Total liabilities 100,000 50,000
Total stockholders’ equity 60,000 130,000
Changes during year in stockholders’ equity:
Additional investment (b) 25,000
Dividends 25,000 (d)
Total revenues 215,000 100,000
Total expenses 185,000 65,000

Instructions
Determine the missing amounts.

Ex. 215
An analysis of the transactions made by White Stripes & Co., a law firm, for the month of July is shown below. Each increase and decrease in stockholders’ equity is explained.

Assets = Liab + Stockholders’ Equity
Retained Earnings
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Com Stock + Rev. -Exp -Div.
1. +$15,000 +$15,000
2. – 2,000 +$5,000 +$3,000
3. – 750 +$750
4. + 2,500 +$6,600 +$9,100 Rev.
5. – 1,500 – 1,500
6. – 2,500 -$2,500 Div.
7. – 750 -$750 Rent.
8. + 550 -550
9. – 3,500 -$4,500 Sal.
10. + 500 + 500 -500 Util.

Instructions
(a) Determine how much stockholders’ equity increased for the month.
(b) Compute the amount of net income for the month.

Ex. 216
The Constantine Company had the following assets and liabilities on the dates indicated.
December 31 Total Assets Total Liabilities
2014 $480,000 $250,000
2015 $460,000 $220,000
2016 $590,000 $300,000
Constantine began business on January 1, 2014, with an investment of $100,000.

Instructions
From an analysis of the change in stockholders’ equity during the year, compute the net income (or loss) for:
(a) 2014, assuming Constantine’s dividends were $45,000 for the year.
(b) 2015, assuming Constantine made an additional investment of $50,000 and paid no dividends in 2015.
(c) 2016, assuming Constantine made an additional investment of $15,000 and paid dividends of $40,000 in 2016.

Ex. 217
For each of the following, indicate whether the transaction affects revenue (R), expense (E), dividends (D), common stock (CS), or no effect on stockholders’ equity (NOE).
1. Made an investment to start the business.
2. Billed customers for services performed.
3. Purchased equipment on account.
4. Paid monthly rent.
5. Paid dividends.

Ex. 218
Presented below is a balance sheet for Jim Henson Yard Service at December 31, 2015.
JIM HENSON YARD SERVICE
Balance Sheet
December 31, 2015

Assets Liabilities and Stockholders’ Equity
Cash $13,000 Liabilities
Accounts receivable 6,000 Accounts payable $ 8,000
Supplies 9,000 Notes payable 15,000
Equipment 11,000 Stockholders’ equity
Common stock 16,000
Total assets $39,000 Total liabilities & stockholders’ equity $39,000

The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total $6,000. Supplies on January 1, were $11,000 and $7,000 of supplies were purchased during the year. Net income for the year was $8,000 and dividends paid were $9,000.

Instructions
Determine the following: (Show all computations.)
1. Supplies used during the year.
2. Total expenses for the year.
3. Service revenues for the year.
4. Stockholders’ equity on January 1.

Ex. 219
Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.

Assets = Liabilities + Stockholders’ Equity

1. Received cash for services provided.
2. Purchased office equipment on credit.
3. Paid employees’ salaries.
4. Received cash from customer in payment
on account.
5. Paid telephone bill for the month.
6. Paid for office equipment purchased in
transaction 2.
7. Purchased office supplies on credit.
8. Paid dividends.
9. Obtained a loan from the bank.
10. Billed customers for services rendered.

Ex. 220
For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and stockholders’ equity using the following format.
Assets = Liabilities + Stockholders’ Equity
1. Issued stock in exchange for cash. 2. Billed customers for services performed. 3. Purchased equipment on account. 4. Paid dividends.
5. Paid for equipment purchased in 3. above.

Ex. 221
Neko Case decides to open a cleaning and laundry service near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity.

Transactions
(1) Issued stock in exchange for $20,000 cash on June 1.
(2) Purchased equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days.
(3) Purchased supplies for $1,200 cash.
(4) Received a bill from College News for $300 for advertising in the campus newspaper.
(5) Cash receipts from customers for cleaning and laundry amounted to $2,400.
(6) Paid salaries of $600 to student workers.
(7) Billed the Lion Soccer Team $450 for cleaning and laundry services.
(8) Paid $300 to College News for advertising that was previously billed in Transaction 4.
(9) Paid dividends of $1,200.
(10) Incurred utility expenses for month on account, $500.

Trans- Accounts Accounts Common Retained
action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings
(1)
——————————————————————————————————————————
Balance
(2)
——————————————————————————————————————————
Balance
(3)
——————————————————————————————————————————
Balance
(4)
——————————————————————————————————————————
Balance
(5)
——————————————————————————————————————————
Balance
(6)
——————————————————————————————————————————
Balance
(7)
——————————————————————————————————————————
Balance
(8)
——————————————————————————————————————————

Ex. 221 (cont.)
Balance
(9)
——————————————————————————————————————————
Balance
(10)
——————————————————————————————————————————
Totals

Ex. 222
For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation.
(a) Increase one asset and decrease another asset.
(b) Increase an asset and increase a liability.
(c) Decrease an asset and decrease a liability.
(d) Increase an asset and increase stockholders’ equity.
(e) Increase one asset, decrease one asset, and increase a liability.

Ex. 223
The following transactions represent part of the activities of Bloc Party Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets.
(a) Issued stock in exchange for cash.
(b) Purchased a computer for cash.
(c) Purchased office equipment with money borrowed from the bank.
(d) Paid the first month’s utility bill.
(e) Collected an accounts receivable.
(f) Paid dividends.

Ex. 224
Selected transactions for Parton Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity.
Sample: Issued common stock in exchange for cash investment.
The answer would be—Increase in assets and increase in stockholders’ equity.
1. Paid monthly utility bill.
2. Purchased new display case for cash.
3. Paid cash for repair work on security system.
4. Billed customers for services performed.
5. Received cash from customers billed in 4.
6. Paid dividends.
7. Incurred advertising expenses on account.
8. Paid monthly rent.
9. Received cash from customers when service was rendered.

Ex. 225
A service company shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction.
Accounts Equip- Accounts Stockholders’
Cash + Rec. + ment + Land + Building = Payable + Equity
——————————————————————————————————————————
$5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000
a) –2,000 –2,000
3,000 6,500 10,000 7,500 50,000 1,000 76,000
b) +1,000 – 1,000
4,000 5,500 10,000 7,500 50,000 1,000 76,000
Ex. 225 (cont.)
c) + 5,000 +5,000
4,000 5,500 15,000 7,500 50,000 6,000 76,000
d) +2,500 + 2,500
6,500 5,500 15,000 7,500 50,000 6,000 78,500
e) +3,000 + 3,000
$6,500 $8,500 $15,000 $7,500 $50,000 $6,000 $81,500

Ex. 226
There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches.

a. Receive cash from customers on account.
b. Issued stock in exchange for cash.
c. Pay cash to reduce an accounts payable.
d. Purchase supplies for cash.
e. Pay cash to reduce a notes payable.
f. Purchase supplies on account.
g. Additional investment by a stockholder.
h. Purchase equipment with a note payable.
i. Pay utilities with cash.
j. Pay dividends.

Ex. 227
An analysis of the transactions made by Cookie Mountain Legal, a law firm, for the month of July is shown below. Each increase and decrease in stockholders’ equity is explained.

Assets = Liab + Stockholders’ Equity
Retained Earnings
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Com Stock + Rev. -Exp -Div.
1. +$15,000 +$15,000
2. – 2,000 +$5,000 +$3,000
3. – 750 +$750
4. + 2,500 +$6,600 +$9,100 Rev.
5. – 1,500 – 1,500
6. – 2,500 -$2,500 Div.
7. – 750 -$750 Rent.
8. + 550 -550
9. – 4,500 -$4,500 Sal.
10. + 500 -500 Util.

Instructions
(a) Prepare an income statement for the month ending July 31, 2015.
(b) Prepare a retained earnings statement for the month ending July 31, 2015.

Ex. 228
An analysis of the transactions made by Cookie Mountain Legal, a law firm, for the month of July is shown below. Each increase and decrease in retained earnings is explained.

Assets = Liab + Stockholders’ Equity
Retained Earnings
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Com Stock + Rev. -Exp -Div.
1. +$15,000 +$15,000
2. – 2,000 +$5,000 +$3,000
3. – 750 +$750
4. + 2,500 +$6,600 +$9,100 Rev.
5. – 1,500 – 1,500
6. – 2,500 -$2,500 Div.
7. – 750 -$750 Rent.
8. + 550 -550
9. – 4,500 -$4,500 Sal.
10. + 500 -500 Util.

Instructions
Prepare a balance sheet at July 31, 2015.

Ex. 229

The following information relates to Bonnie Billy Co. for the year 2015.

Retained earnings, January 1, 2015 $ 67,000 Advertising expense $6,500
Dividends 6,000 Rent expense 9,500
Service revenue 65,500 Utilities expense 1,400
Salaries and wages expense 29,000

Instructions
After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2015

Ex. 230

Van Occupanther is the bookkeeper for Roscoe Company. Van has been trying to get the balance sheet of Roscoe Company to balance. Roscoe’s balance sheet is as follows.

ROSCOE COMPANY
Balance Sheet
December 31, 2015

Assets Liabilities
Cash $9,400 Accounts payable $25,000
Supplies 7,100 Accounts receivable (19,500)
Equipment 45,000 Common stock 40,000
Dividends 9,200 Retained earnings 25,200
Total assets $70,700 Total liabilities and
stockholders’ equity $70,700

Instructions
Prepare a correct balance sheet.

Ex. 231
Presented below is information related to Anthony Scalici Company.

Retained earnings, January 1, 2015 $ 21,000
Service revenue—2015 320,000
Total expenses—2015 213,000
Assets, January 1, 2015 85,000
Liabilities, January 1, 2015 64,000
Assets, December 31, 2015 165,000
Liabilities, December 31, 2015 90,000
Dividends—2015 ?

Instructions
Prepare the 2015 retained earnings statement for Anthony Scalici Company.

Ex. 232
Prepare an income statement, a retained earnings statement, and a balance sheet for the accupuncture practice of Golda Bear, from the items listed below for the month of September, 2015.

Retained earnings, September 1 $17,000
Common stock 30,000
Accounts payable 7,000
Equipment 35,000
Service revenue 28,000
Dividends 6,000
Supplies expense 4,500
Cash 3,000
Utilities expense 700
Supplies 4,800
Salaries and wages expense 9,000
Accounts receivable 14,000
Rent expense 5,000
GOLDA BEAR, ACCUPUNCTURIST
Income Statement
For the Month Ended September 30, 2015
——————————————————————————————————————————
Revenues $

Expenses $ $

Total expenses $

Net income $

GOLDA BEAR, ACCUPUNCTURIST
Retained Earnings Statement
For the Month Ended September 30, 2015
——————————————————————————————————————————
Retained Earnings, September 1 $
Add:

$

Less:

$

Ex. 232 (cont.)
GOLDA BEAR, ACCUPUNCTURIST
Balance Sheet
September 30, 2015
——————————————————————————————————————————
Assets
$

Total assets
$

Liabilities and Stockholder’ Equity

Liabilities
$

Stockholders’ Equity $

Total liabilities and stockholders’ equity $

Ex. 233
Indicate whether the following items would appear on the balance sheet (BS), income statement (IS), or retained earnings statement (RE).
1. Advertising expense 2. Accounts receivable 3. Dividends 4. Rent revenue 5. Salaries and wages payable 6. Supplies

Ex. 234
Listed below in alphabetical order are the balance sheet items of Rock Plaza Company at December 31, 2015. Prepare a balance sheet and include a complete heading.
Accounts Payable $ 24,000
Accounts Receivable 15,000
Buildings 51,000
Cash 7,000
Common Stock 102,000
Land 42,000
Equipment 11,000

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 235
One item is omitted in each of the following summaries of balance sheet and income statement data for three different sole corporations, X, Y, and Z. Determine the amounts of the missing items, identifying each corporation by letter.
Corporation
X Y Z
Beginning of the Year:
Assets $390,000 $150,000 $219,000
Liabilities 250,000 105,000 168,000
End of the Year:
Assets 450,000 175,000 195,000
Liabilities 280,000 95,000 169,000
During the Year:
Issued additional shares of stock ? 79,000 80,000
Dividends 90,000 83,000 ?
Revenue 195,000 ? 187,000
Expenses 170,000 113,000 175,000

Ex. 236
Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Balance Sheet (BS), or Retained Earnings Statement (RE):

a. Service Revenue g. Accounts Receivable

b. Utilities Expense h. Retained Earnings (ending)

c. Cash i. Equipment

d. Accounts Payable j. Advertising Expense

e. Office Supplies k. Dividends

f. Salaries Expense l. Notes Payable

Ex. 237
Maria Queen was reviewing her business activities at the end of the year (2015) and decided to prepare a Retained Earnings Statement. At the beginning of the year her assets were $700,000 and her liabilities were $210,000. At the end of the year the assets had grown to $930,000 but liabilities had also increased to $340,000. Common Stock was $200,000 in both years. The net income for the year was $220,000. The company paid dividends of $120,000 during the year.

Prepare a Retained Earnings statement in good form.

Ex. 238
At September 1, the balance sheet accounts for Stanley’s Restaurant were as follows:

Accounts Payable $ 3,800 Land $33,000
Accounts Receivable 9,600 Common Stock ?
Buildings 68,000 Notes Payable 48,000
Cash 10,000 Supplies 6,600
Equipment 18,700

The following transactions occurred during the next two days:

The company issued additional shares of stock for $22,000 cash in the business. The accounts payable were paid in full. (No payment was made on the notes payable.)

Instructions
Prepare a balance sheet at September 1, 2015.

Ex. 239
Presented below are balance sheet items for Black Angel Company at December 31, 2015.
Accounts payable $35,000 Accounts receivable 36,000 Cash 17,000 Equipment 77,000 Common stock 45,000 Notes payable 50,000
Compute each of the following: 1. Total assets. 2. Total liabilities.

COMPLETION STATEMENTS

240. Accounting is an information system that identifies, _____________, and _____________ the economic events of an organization.

241. The mere recording of economic events is called ______________, and is just one part of the _______________ process.

242. The three major services rendered by a certified public accountant are ______________, ________________, and management ________________.

243. Accountants who are employees of business enterprises are referred to as ________________ accountants.

244. A common set of standards that provides guidelines to accountants and indicates how to report economic events is called _________________.

245. The ________________ principle states that assets should be recorded at the value exchanged at the time the asset is acquired.

246. The _________________ assumption requires that the activities of an entity be kept separate from the activities of its owner.

247. The residual claim on total assets of a business is known as ________________ and is equal to total assets minus total liabilities.

248. Dividends ________________ stockholders’ equity but are not expenses.

249. The ________________ reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date.

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

A. CPA F. Corporation
B. Budgeting G. Assets
C. SEC H. Equities
D. Proprietorship I. Expenses
E. Economic Entity Assumption J. Transaction

1. Activities of an entity must be kept separate from its owner’s activities.
2. Consumed assets or services.
3. Ownership is limited to one person.
4. Offers expert accounting service to the general public.
5. Creditor and ownership claims against the assets of the business.
6. A separate legal entity under state laws.
7. Government agency that can mandate accounting rules.
8. Quantifying goals and objectives.
9. Future economic benefits.
10. Economic events recorded by accountants.

SHORT-ANSWER ESSAY QUESTIONS

*S-A E 251
The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas.

S-A E 252
The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation?

S-A E 253
Your friend, Angela, made this comment:
My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting.

What is your response to Angela?

S-A E 254
The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users.

S-A E 255 (Ethics)
Joanna Newsom owns and operates Joanna’s Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joanna’s Burgers began to have problems. Most of the problems were related to Joanna’s expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joanna does not have the cash or financial backing to expand further. She has therefore decided to sell her business.

Vivian Girls is interested in purchasing the business. However, she is located in another city and is unfamiliar with Newton. She has asked Joanna why she is selling Joanna’s Burgers. Joanna replies that her elderly mother requires extra care, and that her brother needs help in his manufacturing business. Both are true, but neither is her primary reason for selling. Joanna reasons that Vivian should not have asked her anyway, since profitable businesses don’t come up for sale.

Required:
1. Identify the stakeholders in this situation.
2. Did Joanna act ethically in not revealing fully her reasons for selling the business? Why or why not?

S-A E 256 (Communication)
Rachel Bells Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients.

She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant.

Required:
Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.

CHALLENGE EXERCISES

CE 1
The total assets and liabilities of Company at January 1 and December 31, 2015 are presented below.
January 1 December 31
Assets $95,000 $140,000
Liabilities 30,000 36,000

Instructions:
1. Assume dividends of $10,800 were paid and no additional stock was issued during the year. Revenues were $110,000. Compute (a) net income, and (b) expenses.
2. Assume additional stock was issued for $4,800 and no dividends were paid during the year. Expenses were $42,000. Compute (a) net income, and (b) revenues.
3. Assume additional stock was issued for $62,000 and dividends of $15,600 were paid during the year. Compute net income.
4. Assume additional stock was issued for $6,000 and net income was $51,000. Compute dividends paid.

CE 2
Windsor Service had the following financial information at the end of 2015.

1/1/15 2015 12/31/15
Accounts payable $19,000
Accounts Receivable 25,000
Advertising Expense $1,000
Cash 16,000
Common Stock 15,000
Dividends 9,000
Equipment 38,000
Notes Payable 20,000
Rent Expense 3,500
Retained Earnings $6,000
Salaries and Wages Expense 20,000
Service Revenue 55,000
Utilities Expense 2,500

Instructions:
Prepare a 2015 income statement, 2015 retained earnings statement, and a 12/31/15 balance sheet for Windsor Service.

CE 3
This information is for Downing Company for the year ended December 31, 2015.
Cash received from revenues from customers $930,000 Cash received for issuance of common stock 420,000 Cash paid for new equipment 150,000 Cash dividends paid 30,000 Cash paid for expenses 640,000 Cash balance 1/1/15 50,000
Instructions
Prepare the 2015 statement of cash flows for Downing Company.

CHAPTER 2

THE RECORDING PROCESS

CHAPTER LEARNING OBJECTIVES

1. Explain what an account is and how it helps in the recording process.
2. Define debits and credits and explain their use in recording business transactions.
3. Identify the basic steps in the recording process.
4. Explain what a journal is and how it helps in the recording process.
5. Explain what a ledger is and how it helps in the recording process.
6. Explain what posting is and how it helps in the recording process.
7. Prepare a trial balance and explain its purposes.

TRUE-FALSE STATEMENTS
1. A new account is opened for each transaction entered into by a business firm.

2. The recording process becomes more efficient and informative if all transactions are recorded in one account.

3. When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers.

4. An account is often referred to as a T-account because of the way it is constructed.

5. A debit to an account indicates an increase in that account.

6. If a revenue account is credited, the revenue account is increased.

7. The normal balance of all accounts is a debit.

8. Debit and credit can be interpreted to mean increase and decrease, respectively.

9. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

10. A credit balance in a liability account indicates that an error in recording has occurred.

11. The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.

12. Revenues are a subdivision of retained earnings.

13. Under the double-entry system, revenues must always equal expenses.

14. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

15. Business documents can provide evidence that a transaction has occurred.

16. Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

17. Transactions are entered in the ledger accounts and then transferred to journals.

18. All business transactions must be entered first in the general ledger.

19. A simple journal entry requires only one debit to an account and one credit to an account.

20. A compound journal entry requires several debits to one account and several credits to one account.

21. Transactions are recorded in alphabetic order in a journal.

22. A journal is also known as a book of original entry.

23. The complete effect of a transaction on the accounts is disclosed in the journal.

24. The account titles used in journalizing transactions need not be identical to the account titles in the ledger.

25. The chart of accounts is a special ledger used in accounting systems.

26. A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the balance sheet accounts.

27. The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises.

28. Posting is the process of proving the equality of debits and credits in the trial balance.

29. After a transaction has been posted, the reference column in the journal should not be blank.

30. A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

31. The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction.

32. The normal balance of an expense is a credit.

33. The journal provides a chronological record of transactions.

34. The ledger is merely a bookkeeping device and therefore does not provide much useful data for management.

35. The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger.

36. The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting.

37. The trial balance will not balance when incorrect account titles are used in journalizing or posting.

MULTIPLE CHOICE QUESTIONS

38. An account consists of
a. one part.
b. two parts.
c. three parts.
d. four parts.

39. The left side of an account is
a. blank.
b. a description of the account.
c. the debit side.
d. the balance of the account.

40. Which one of the following is not a part of an account?
a. Credit side
b. Trial balance
c. Debit side
d. Title

41. An account is a part of the financial information system and is described by all except which one of the following?
a. An account has a debit and credit side.
b. An account is a source document.
c. An account may be part of a manual or a computerized accounting system.
d. An account has a title.

42. The right side of an account
a. is the correct side.
b. reflects all transactions for the accounting period.
c. shows all the balances of the accounts in the system.
d. is the credit side.

43. An account consists of
a. a title, a debit balance, and a credit balance.
b. a title, a left side, and a debit balance.
c. a title, a debit side, and a credit side.
d. a title, a right side, and a debit balance.

44. A T-account is
a. a way of depicting the basic form of an account.
b. what the computer uses to organize bytes of information.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.

45. Credits
a. decrease both assets and liabilities.
b. decrease assets and increase liabilities.
c. increase both assets and liabilities.
d. increase assets and decrease liabilities.

46. A debit to an asset account indicates
a. an error.
b. a credit was made to a liability account.
c. a decrease in the asset.
d. an increase in the asset.

47. The normal balance of any account is the
a. left side.
b. right side.
c. side which increases that account.
d. side which decreases that account.

48. The double-entry system requires that each transaction must be recorded
a. in at least two different accounts.
b. in two sets of books.
c. in a journal and in a ledger.
d. first as a revenue and then as an expense.

49. A credit is not the normal balance for which account listed below?
a. Common stock account
b. Revenue account
c. Liability account
d. Dividends account

50. Which one of the following represents the expanded basic accounting equation?
a. Assets = Liabilities + Common stock + Retained Earnings + Dividends – Revenues – Expenses.
b. Assets + Dividends + Expenses = Liabilities + Common stock + Retained Earnings + Revenues.
c. Assets – Liabilities – Dividends = Common stock + Retained Earnings + Revenues – Expenses.
d. Assets = Revenues + Expenses – Liabilities.

51. Which of the following correctly identifies normal balances of accounts?
a. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Debit
Expenses Credit
b. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Credit
Expenses Credit
c. Assets Credit
Liabilities Debit
Stockholders’ Equity Debit
Revenues Credit
Expenses Debit
d. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Credit
Expenses Debit

52. The best interpretation of the word credit is the
a. offset side of an account.
b. increase side of an account.
c. right side of an account.
d. decrease side of an account.

53. In recording an accounting transaction in a double-entry system
a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation.
c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.

54. An accounting convention is best described as
a. an absolute truth.
b. an accounting custom.
c. an optional rule.
d. something that cannot be changed.

55. A debit is not the normal balance for which account listed below?
a. Dividends
b. Cash
c. Accounts Receivable
d. Service Revenue

56. An accountant has debited an asset account for $1,200 and credited a liability account for $500. What can be done to complete the recording of the transaction?
a. Nothing further must be done.
b. Debit a Stockholders’ equity account for $700.
c. Debit another asset account for $700.
d. Credit a different asset account for $700.

57. An accountant has debited an asset account for $1,300 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction?
a. Credit an asset account for $800.
b. Credit another liability account for $800.
c. Credit a Stockholders’ account for $800.
d. Debit a Stockholders’ account for $800.

58. Which of the following is not true of the terms debit and credit?
a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and decrease.
c. They can be used to describe the balance of an account.
d. They can be interpreted to mean left and right.

59. An account will have a credit balance if the
a. credits exceed the debits.
b. first transaction entered was a credit.
c. debits exceed the credits.
d. last transaction entered was a credit.

60. For the basic accounting equation to stay in balance, each transaction recorded must
a. affect two or less accounts.
b. affect two or more accounts.
c. always affect exactly two accounts.
d. affect the same number of asset and liability accounts.

61. Which of the following statements is true?
a. Debits increase assets and increase liabilities.
b. Credits decrease assets and decrease liabilities.
c. Credits decrease assets and increase liabilities.
d. Debits decrease liabilities and decrease assets.

62. Assets normally show
a. credit balances.
b. debit balances.
c. debit and credit balances.
d. debit or credit balances.

63. An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?
a. A debit balance in the dividends account
b. A credit balance in an expense account
c. A credit balance in a liabilities account
d. A credit balance in a revenue account

64. If a company has overdrawn its bank balance, then
a. its cash account will show a debit balance.
b. its cash account will show a credit balance.
c. the cash account debits will exceed the cash account credits.
d. it cannot be detected by observing the balance of the cash account.

65. Which account below is not a subdivision of retained earnings?
a. Dividends
b. Revenues
c. Expenses
d. Common stock

66. When a company pays dividends
a. it doesn’t have to be cash, it could be another asset.
b. the dividends account will be increased with a credit.
c. the retained earnings account will be directly increased with a debit.
d. the dividends account will be decreased with a debit.

67. The Dividends account
a. appears on the income statement along with the expenses of the business.
b. must show transactions every accounting period.
c. is increased with debits and decreased with credits.
d. is not a proper subdivision of retained earnings.

68. Which of the following statements is incorrect?
a. Expenses increase stockholders’ equity.
b. Expenses have normal debit balances.
c. Expenses decrease stockholders’ equity.
d. Expenses are a negative factor in the computation of net income.

69. A credit to a liability account
a. indicates an increase in the amount owed to creditors.
b. indicates a decrease in the amount owed to creditors.
c. is an error.
d. must be accompanied by a debit to an asset account.

70. In the first month of operations, the total of the debit entries to the cash account amounted to $1,200 and the total of the credit entries to the cash account amounted to $800. The cash account has a(n)
a. $800 credit balance.
b. $1,200 debit balance.
c. $400 debit balance.
d. $400 credit balance.

71. TransAm Mail Service purchased equipment for $2,500. TransAm paid $400 in cash and signed a note for the balance. TransAm debited the Equipment account, credited Cash and
a. nothing further must be done.
b. debited the retained earnings account for $2,100.
c. credited another asset account for $400.
d. credited a liability account for $2,100.

72. Radio Moscow Industries purchased supplies for $1,000. They paid $400 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for $1,000, a credit to a liability account for $600. Which of the following would be the correct way to complete the recording of the transaction?
a. Credit an asset account for $400.
b. Credit another liability account for $400.
c. Credit the retained earnings account for $400.
d. Debit the retained earnings account for $400.

73. On January 14, Edamame Industries purchased supplies of $700 on account. The entry to record the purchase will include
a. a debit to Supplies and a credit to Accounts Payable.
b. a debit to Supplies Expense and a credit to Accounts Receivable.
c. a debit to Supplies and a credit to Cash.
d. a debit to Accounts Receivable and a credit to Supplies.

74. On June 1, 2015, Portugal Inc. reported a cash balance of $12,000. During June, Portugal made deposits of $5,000 and made disbursements totalling $14,000. What is the cash balance at the end of June?
a. $3,000 debit balance
b. $17,000 debit balance
c. $3,000 credit balance
d. $2,000 credit balance

75. At January 1, 2015, Alligator Industries reported retained earnings of $150,000. During 2015, Alligator had a net loss of $30,000 and paid dividends of $15,000. At December 31, 2015, the amount of retained earnings is
a. $105,000.
b. $120,000.
c. $135,000.
d. $165,000.

76. Mt. Zion Inc. pays its employees twice a month, on the 7th and the 21st. On June 21, Mt. Zion Inc. paid employee salaries of $5,000. This transaction would
a. increase stockholders’ equity by $5,000.
b. decrease the balance in Salaries and Wages Expense by $5,000.
c. decrease net income for the month by $5,000.
d. be recorded by a $5,000 debit to Salaries and Wages Payable and a $4,000 credit to Salaries and Wages Expense.

77. In the first month of operations for Gallowsbird Industries, the total of the debit entries to the cash account amounted to $36,000 ($16,000 investment by stockholders and revenues of $20,000). The total of the credit entries to the cash account amounted to $22,000 (purchase of equipment $8,000 and payment of expenses $14,000). At the end of the month, the cash account has a(n)
a. $6,000 credit balance.
b. $6,000 debit balance.
c. $14,000 debit balance.
d. $14,000 credit balance.

78 Chik Chik Company showed the following balances at the end of its first year:
Cash $ 6,000
Prepaid insurance 9,400
Accounts receivable 7,000
Accounts payable 5,600
Notes payable 8,400
Common stock 2,800
Dividends 1,400
Revenues 44,000
Expenses 35,000
What did Chik Chik Company show as total credits on its trial balance?
a. $51,400
b. $60,800
c. $62,200
d. $70,200

79. Electrelane Company showed the following balances at the end of its first year:
Cash $ 4,000
Prepaid insurance 7,000
Accounts receivable 5,000
Accounts payable 4,000
Notes payable 6,000
Common stock 2,000
Dividends 1,000
Revenues 32,000
Expenses 25,000

What did Electrelene Company show as total credits on its trial balance?
a. $9,000
b. $44,000
c. $45,000
d. $49,000

80. During February 2015 its first month of operations, the stockholders of Ariel Pink Enterprises invested cash of $50,000. Ariel had cash revenues of $10,000 and paid expenses of $14,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28?
a. $4,000 credit
b. $4,000 debit
c. $46,000 debit
d. $54,000 debit

81. At January 31, 2015, the balance in Aislers Inc.’s supplies account was $750. During February, Aislers purchased supplies of $900 and used supplies of $1,125. At the end of February, the balance in the supplies account should be
a. $525 debit.
b. $975 debit.
c. $525 credit.
d. $775 debit.

82. At December 1, 2015, Cursive Company’s accounts receivable balance was $1,800. During December, Cursive had credit revenues of $7,200 and collected accounts receivable of $6,000. At December 31, 2015, the accounts receivable balance is
a. $600 debit.
b. $3,000 debit.
c. $600 credit.
d. $3,000 credit.

83. At October 1, 2015, Padilla Industries had an accounts payable balance of $40,000. During the month, the company made purchases on account of $33,000 and made payments on account of $48,000. At October 31, 2015, the accounts payable balance is
a. $25,000.
b. $41,000.
c. $55,000.
d. $121,000.

84. During 2015, its first year of operations, Neko’s Bakery had revenues of $60,000 and expenses of $35,000. The business paid dividends of $20,000. What is the amount of stockholders’ equity at December 31, 2015?
a. $0
b. $5,000 credit
c. $25,000 credit
d. $20,000 debit

85. On July 7, 2015, Hidden Camera Enterprises performed cash services of $1,700. The entry to record this transaction would include
a. a debit to Service Revenue of $1,700.
b. a credit to Accounts Receivable of $1,700.
c. a debit to Cash of $1,700.
d. a credit to Accounts Payable of $1,700.

86. At September 1, 2015, Promise Ring Co. reported stockholders’ equity of $156,000. During the month, Promise Ring generated revenues of $38,000, incurred expenses of $21,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the amount of stockholders’ equity at September 30, 2015?
a. $166,000
b. $171,000
c. $173,000
d. $176,000

87. The final step in the recording process is to
a. analyze each transaction.
b. enter the transaction in a journal.
c. prepare a trial balance.
d. transfer journal information to ledger accounts.

88. The usual sequence of steps in the transaction recording process is:
a. journal  analyze  ledger.
b. analyze  journal  ledger.
c. journal  ledger  analyze.
d. ledger  journal  analyze.

89. In recording business transactions, evidence that an accounting transaction has taken place is obtained from
a. business documents.
b. the Internal Revenue Service.
c. the public relations department.
d. the SEC.

90. After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to
a. the company’s bank.
b. stockholders’ equity.
c. ledger accounts.
d. financial statements.

91. The first step in the recording process is to
a. prepare financial statements.
b. analyze each transaction for its effect on the accounts.
c. post to a journal.
d. prepare a trial balance.

92. Evidence that would not help with determining the effects of a transaction on the accounts would be a(n)
a. cash register sales tape.
b. bill.
c. advertising brochure.
d. check.

93. After transaction information has been recorded in the journal, it is transferred to the
a. trial balance.
b. income statement.
c. book of original entry.
d. ledger.

94. The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the
a. journal, and transfer the information to the ledger accounts.
b. ledger, and transfer the information to the journal.
c. book of accounts, and transfer the information to the journal.
d. book of original entry, and transfer the information to the journal.

95. The final step in the recording process is to transfer the journal information to the
a. trial balance.
b. financial statements.
c. ledger.
d. file cabinets.

96. The recording process occurs
a. once a year.
b. once a month.
c. repeatedly during the accounting period.
d. infrequently in a manual accounting system.

97. A compound journal entry involves
a. two accounts.
b. three accounts.
c. three or more accounts.
d. four or more accounts.

98. A journal provides
a. the balances for each account.
b. information about a transaction in several different places.
c. a list of all accounts used in the business.
d. a chronological record of transactions.

99. When three or more accounts are required in one journal entry, the entry is referred to as a
a. compound entry.
b. triple entry.
c. multiple entry.
d. simple entry.

100. When two accounts are required in one journal entry, the entry is referred to as a
a. balanced entry.
b. simple entry.
c. posting.
d. nominal entry.

101. Another name for journal is
a. listing.
b. book of original entry.
c. book of accounts.
d. book of source documents.

102. The standard format of a journal would not include
a. a reference column.
b. an account title column.
c. a T-account.
d. a date column.

103 Transactions in a journal are recorded in
a. account number order.
b. dollar amount order.
c. alphabetical order.
d. chronological order.

104 A journal is not useful for
a. disclosing in one place the complete effect of a transaction.
b. preparing financial statements.
c. providing a record of transactions.
d. locating and preventing errors.

105 A complete journal entry does not show
a. the date of the transaction.
b. the new balance in the accounts affected by the transaction.
c. a brief explanation of the transaction.
d. the accounts and amounts to be debited and credited.

106. The name given to entering transaction data in the journal is
a. chronicling.
b. listing.
c. posting.
d. journalizing.

107. The standard form of a journal entry has the
a. debit account entered first and indented.
b. credit account entered first and indented.
c. debit account entered first at the extreme left margin.
d. credit account entered first at the extreme left margin.

108. When journalizing, the reference column is
a. left blank.
b. used to reference the source document.
c. used to reference the journal page.
d. used to reference the financial statements.

109. On June 1, 2015 Ted Leo buys a copier machine for his business and finances this purchase with cash and a note. When journalizing this transaction, he will
a. use two journal entries.
b. make a compound entry.
c. make a simple entry.
d. list the credit entries first, which is proper form for this type of transaction.

110. Which of the following journal entries is recorded correctly and in the standard format?
a. Salaries and Wages Expense 500
Cash 1,500
Advertising Expense . 1,000

b. Salaries and Wages Expense . 500
Advertising Expense . 1,000
Cash 1,500

c. Cash 1,500
Salaries and Wages Expense 500
Advertising Expense 1,000

d. Salaries and Wages Expense 500
Advertising Expense 1,000
Cash . 1,500

111. The ledger should be arranged in
a. alphabetical order.
b. chronological order.
c. dollar amount order.
d. financial statement order.

112. The entire group of accounts maintained by a company is called the
a. chart of accounts.
b. general journal.
c. general ledger.
d. trial balance.

113. An accounting record of the balances of all assets, liabilities, and stockholders’ equity accounts is called a
a. compound entry.
b. general journal.
c. general ledger.
d. chart of accounts.

114. The usual order of accounts in the general ledger is
a. assets, liabilities, common stock, retained earnings, dividends, revenues, and expenses.
b. assets, liabilities, dividends, common stock, retained earnings, expenses, and revenues.
c. liabilities, assets, common stock, retained earnings, revenues, expenses, and dividends.
d. common stock, retained earnings, assets, liabilities, dividends, expenses, and revenues.

115. Management could determine the amounts due from customers by examining which ledger account?
a. Service Revenue
b. Accounts Payable
c. Accounts Receivable
d. Supplies

116. The ledger accounts should be arranged in
a. chronological order.
b. alphabetical order.
c. financial statement order.
d. order of appearance in the journal.

117. A three column form of account is so named because it has columns for
a. debit, credit, and account name.
b. debit, credit, and reference.
c. debit, credit, and balance.
d. debit, credit, and date.

118. On August 13, 2015, Swell Maps Enterprises purchased equipment for $1,300 and supplies of $200 on account. Which of the following journal entries is recorded correctly and in the standard format?
a. Equipment 1,300
Account Payable 1,500
Supplies 200

b. Equipment 1,300
Supplies 200
Accounts Payable 1,500

c. Accounts Payable 1,500
Equipment 1,300
Supplies 200

d. Equipment 1,300
Supplies 200
Accounts Payable. 1,500

119. Delta72 Company received a cash advance of $700 from a customer. As a result of this event,
a. assets increased by $700.
b. stockholders’ equity increased by $700.
c. liabilities decreased by $700.
d. assets and stockholders’ equity increased by $700.

120. Camper Van Company purchased equipment for $2,600 cash. As a result of this event,
a. stockholders’ equity decreased by $2,600.
b. total assets increased by $2,600.
c. total assets remained unchanged.
d. stockholders’ equity decreased and total assets increased by $2,600.

121. Beethoven Company provided consulting services and billed the client $3,100. As a result of this event,
a. assets remained unchanged.
b. assets increased by $3,100.
c. stockholders’ equity increased by $3,100.
d. assets and stockholders’ equity both increased by $3,100.

122. The first step in posting involves
a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal.
b. writing in the journal the account number to which the debit amount was posted.
c. writing in the journal the account number to which the credit amount was posted.
d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal.

123. A chart of accounts usually starts with
a. asset accounts.
b. expense accounts.
c. liability accounts.
d. revenue accounts.

124. The procedure of transferring journal entries to the ledger accounts is called
a. journalizing.
b. analyzing.
c. reporting.
d. posting.

125. A number in the reference column in a general journal indicates
a. that the entry has been posted to a particular account.
b. the page number of the journal.
c. the dollar amount of the transaction.
d. the date of the transaction.

126. A chart of accounts for a business firm
a. is a graph.
b. indicates the amount of profit or loss for the period.
c. lists the accounts and account numbers that identify their location in the ledger.
d. shows the balance of each account in the general ledger.

127. Posting
a. should be performed in account number order.
b. accumulates the effects of journalized transactions in the individual accounts.
c. involves transferring all debits and credits on a journal page to the trial balance.
d. is accomplished by examining ledger accounts and seeing which ones need updating.

128. After journal entries are posted, the reference column
a. of the general journal will be blank.
b. of the general ledger will show journal page numbers.
c. of the general journal will show “Dr” or “Cr”.
d. of the general ledger will show account numbers.

129. The explanation column of the general ledger
a. is completed without exception.
b. is nonexistent.
c. is used infrequently.
d. shows account titles.

130. A numbering system for a chart of accounts
a. is prescribed by GAAP.
b. is uniform for all businesses.
c. usually starts with income statement accounts.
d. usually starts with balance sheet accounts.

131. The first step in designing a computerized accounting system is the creation of the
a. general ledger.
b. general journal.
c. trial balance.
d. chart of accounts.

132. The steps in preparing a trial balance include all of the following except
a. listing the account titles and their balances.
b. totaling the debit and credit columns.
c. proving the equality of the two columns.
d. transferring journal amounts to ledger accounts.

133. A trial balance may balance even when each of the following occurs except when
a. a transaction is not journalized.
b. a journal entry is posted twice.
c. incorrect accounts are used in journalizing.
d. a transposition error is made.

134. A list of accounts and their balances at a given time is called a(n)
a. journal.
b. posting.
c. trial balance.
d. income statement.

135. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates
a. no errors have been made.
b. no errors can be discovered.
c. that all accounts reflect correct balances.
d. the mathematical equality of the accounting equation.

136. A trial balance is a listing of
a. transactions in a journal.
b. the chart of accounts.
c. general ledger accounts and balances.
d. the totals from the journal pages.

137. Customarily, a trial balance is prepared
a. at the end of each day.
b. after each journal entry is posted.
c. at the end of an accounting period.
d. only at the inception of the business.

138. A trial balance would only help in detecting which one of the following errors?
a. A transaction that is not journalized
b. A journal entry that is posted twice
c. Offsetting errors are made in recording the transaction
d. A transposition error when transferring the debit side of journal entry to the ledger

139. An account is an individual accounting record of increases and decreases in specific
a. liabilities.
b. assets.
c. expenses.
d. assets, liabilities, and stockholders’ equity items.

140. A debit is not the normal balance for which of the following?
a. Asset account
b. Dividends account
c. Expense account
d. Common stock account

141. Which of the following rules is incorrect?
a. Credits decrease the dividends account.
b. Debits increase the common stock account.
c. Credits increase revenue accounts.
d. Debits decrease liability accounts.

142. Which of the following statements is false?
a. Revenues increase stockholders’ equity.
b. Revenues have normal credit balances.
c. Revenues are a positive factor in the computation of net income.
d. Revenues are increased by debits.

143. Which of the following is the correct sequence of steps in the recording process?
a. Posting, journalizing, analyzing
b. Journalizing, analyzing, posting
c. Analyzing, posting, journalizing
d. Analyzing, journalizing, posting

144. Which of the following is false about a journal?
a. It discloses in one place the complete effects of a transaction.
b. It provides a chronological record of transactions.
c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared.
d. It keeps in one place all the information about changes in specific account balances.

145. Deerhoof Company purchases equipment for $2,700 and supplies for $400 from Milkman Co. for $3,100 cash. The entry for this transaction will include a
a. debit to Equipment $2,700 and a debit to Supplies Expense $400 for Milkman.
b. credit to Cash for Milkman.
c. credit to Accounts Payable for Deerhoof.
d. debit to Equipment $2,700 and a debit to Supplies $400 for Deerhoof.

146. Devendra Company pays cash dividends of $600. The entry for this transaction will include a debit of $600 to
a. Dividends
b. Retained Earnings.
c. Owner’s Salaries Expense.
d. Salaries and Wages Expense.

147. On October 3, Karl Schickele, a carpenter, received a cash payment for services previously billed to a client. Karl paid his telephone bill, and he also bought equipment on credit. For the three transactions, at least one of the entries will include a
a. credit to Retained Earnings.
b. credit to Notes Payable.
c. debit to Accounts Receivable.
d. credit to Accounts Payable.

148. Posting of journal entries should be done in
a. account number order.
b. alphabetical order.
c. chronological order.
d. dollar amount order.

149. The chart of accounts is a
a. list of accounts and their balances at a given time.
b. device used to prove the mathematical accuracy of the ledger.
c. listing of the accounts and the account numbers which identify their location in the ledger.
d. required step in the recording process.

150. Which of the following is incorrect regarding a trial balance?
a. It proves that the debits equal the credits after posting.
b. It proves that the company has recorded all transactions.
c. A trial balance uncovers errors in journalizing and posting.
d. A trial balance is useful in the preparation of financial statements.

151. A trial balance will not balance if
a. a journal entry is posted twice.
b. a wrong amount is used in journalizing.
c. incorrect account titles are used in journalizing.
d. a journal entry is only partially posted.

152. Which of the following are the same under both GAAP and IFRS?
a. The account.
b. Debit and credit rules.
c. Steps in the recording process.
d. All of these answers are correct.

153. Which of the following are the same under both GAAP and IFRS?
a. The journal.
b. The ledger.
c. The chart of accounts.
d. All of these answers are correct.

154. Which of the following is true?
a. Transaction analysis is completely different under IFRS and GAAP.
b. Most transactions are recorded differently under IFRS and GAAP.
c. Transaction analysis is the same under IFRS and GAAP, but some transactions are recorded differently.
d. All transactions are recorded the same under IFRS and GAAP.

155. European companies rely
a. less on historical cost and more on fair values than U.S. companies.
b. less on fair values and more on historical cost than U.S. companies.
c. completely on fair values for financial reporting.
d. completely on historical cost for financial reporting.

156. The double–entry accounting system is the basis of accounting systems
a. worldwide.
b. worldwide, except for the U.S.
c. in the U.S. only
d. neither internationally nor in the U.S.

157. Under IFRS, the trial balance
a. follows the same format as under GAAP.
b. shows credits on the left and debits on the right.
c. includes less accounts than under GAAP.
d. includes more accounts than under GAAP.

158. In deciding whether the U.S. should adopt IFRS, the issue the SEC said should be considered is
a. whether IFRS is sufficiently developed and consistent in application.
b. whether the IFRS is established for the benefit of investors.
c. the impact of a switch to IFRS on U.S. laws and regulations.
d. all of these answers are correct.

BRIEF EXERCISES

BE 159
At June 1, 2015, Coquehcot Industries had an accounts receivable balance of $12,000. During the month, the company performed credit services of $30,000 and collected accounts receivable of $22,000. What is the balance in accounts receivable at June 30, 2015?

BE 160

TNT has the following transactions during April of the current year. Indicate
(a) the effect on the accounting equation and (b) the debit-credit analysis.

Apr. 1 Opens a law office, investing $25,000 in cash.
4 Pays rent in advance for 6 months, $9,000 cash.
16 Receives $8,000 from clients for services provided.
27 Pays secretary $2,800 salary.

BE 161
For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–).
Debit_ _Credit_ Normal Balance
1. Salaries and wages expense.
2. Accounts receivable.
3. Service revenue.
4. Common stock.
5. Dividends.

BE 162
For each of the following transactions of Neon Garden, identify the account to be debited and the account to be credited.
1. Purchased 18-month insurance policy for cash.
2. Paid weekly payroll.
3. Purchased supplies on account.
4. Received utility bill to be paid at later date.

BE 163
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction.
1. Andrew Bird invested $35,000 cash in exchange for stock.
2. Hired an employee to be paid $400 per week, starting tomorrow.
3. Paid two years’ rent in advance, $7,440.
4. Paid the worker’s weekly wage.
5. Recorded revenue earned and received for the week, $1,900.

BE 164
Identify the impact on the accounting equation of the following transactions.
1. Purchased 36-month insurance policy for cash.
2. Purchased supplies on account.
3. Received utility bill to be paid at later date.
4. Paid utility bill previously accrued.

BE 165
Journalize the following transactions for Xiu Xiu Company for June 2015, the company’s first month of operations. You may omit explanations for the transactions.
1. Purchased equipment on account for $9,000.
2. Billed customers $5,000 for services performed.
3. Made payment of $2,300 on account for equipment purchased earlier in month.
4. Collected $2,900 on customer accounts.

BE 166
The following transactions took place for Xiu Xiu Company:
(a) Purchased equipment on account for $9,000.
(b) Billed customers $5,000 for services performed.
(c) Made payment of $2,300 on account for equipment purchased earlier in month.
(d) Collected $2,900 on customer accounts.

1. What is the balance in Accounts Payable at June 30, 2015?
2. What is the balance in Accounts Receivable at June 30, 2015?

BE 167
The transactions of the Liberty Belle Store are recorded in the general journal below. You are to post the journal entries to T-accounts.

General Journal

Date Account Titles Debit Credit

2015
Aug. 5 Accounts Receivable 4,400
Service Revenue 4,400

10 Cash 3,000
Service Revenue 3,000

19 Rent Expense 1,100
Cash 1,100

25 Cash 1,400
Accounts Receivable 1,400

BE 167 (cont.)
General Ledger
Cash Accounts Receivable

Service Revenue Rent Expense

BE 168
Prepare a trial balance from the ledger accounts of Black Diamond Express as of January 31, 2015.

Accounts Payable $1,100 Rent Expense $ 500
Accounts Receivable 1,700 Service Revenue 3,000
Cash 1,400 Supplies 200
Common stock 2,000 Salaries and Wages Expense 1,300
Dividends 1,000

BE 169
Prepare a corrected trial balance for Stereolab Company. All accounts should have a normal balance.

STEROELAB COMPANY
Trial Balance
For the Quarter Ended 3/31/15

Debit Credit
Cash $14,000
Accounts Receivable $ 23,000
Prepaid Insurance 2,500
Equipment 60,000
Accounts Payable 15,000
Unearned Service Revenue 10,000
Notes Payable 25,000
Common stock 38,000
Dividends 1,500
Service Revenue 43,000
Salaries and Wages Expense 15,000
Utilities Expense 5,000
Rent Expense 10,000
$116,500 $145,500

EXERCISES

Ex. 170
The chart of accounts used by Notwist Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes.
CHART OF ACCOUNTS
101 Cash 209 Unearned Service Revenue
112 Accounts Receivable 311 Common Stock
125 Supplies 332 Dividends
157 Equipment 400 Service Revenue
200 Notes Payable 610 Advertising Expense
201 Accounts Payable 729 Rent Expense
———————————————————————————————————————————
Number(s) Number(s)
of account(s) of account(s)
debited credited
1. The company issues stock in exchange for $70,000 cash.
———————————————————————————————————————————
2. Purchased three pieces of equipment for $160,000, paying $50,000 cash and signing a 5-year, 10% note for the remainder.
———————————————————————————————————————————
3. Purchased $5,000 supplies on credit.
———————————————————————————————————————————
4. Cash revenue amounted to $7,000.
———————————————————————————————————————————
5. Paid $500 cash for radio advertising.
———————————————————————————————————————————
6. Paid $800 on account for supplies purchased in transaction 3.
———————————————————————————————————————————
7. The company paid dividends of $2,100.
———————————————————————————————————————————
8. Paid $1,200 cash for rent for the current month.
———————————————————————————————————————————
9. Received $2,000 cash advance from a customer for future copying.
———————————————————————————————————————————
10. Billed a customer for $575 for photocopy work done.
———————————————————————————————————————————

Ex. 171
Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account.

Debit or Credit

1. An increase in Salaries and Wages Expense.

2. A decrease in Accounts Payable.

3. An increase in Prepaid Insurance.

4. An increase in Common Stock.

5. A decrease in Supplies.

6. An increase in Dividends.

7. An increase in Service Revenue.

8. A decrease in Accounts Receivable.

9. An increase in Rent Expense.

10. A decrease in Equipment.

Ex. 172
Selected transactions for Good Home, a property management company, in its first month of business, are as follows:

Jan. 2 Issued stock to investors for $15,000 cash.
3 Purchased used car for $5,200 cash for use in business.
9 Purchased supplies on account for $500.
11 Billed customers $2,100 for services performed.
16 Paid $450 cash for advertising.
20 Received $1,300 cash from customers billed on January 11.
23 Paid creditor $300 cash on balance owed.
28 Paid dividends of $2,000.

Instructions
For each transaction indicate the following.
(a) The basic type of account debited and credited (asset (A), liability (L), stockholders’ equity (SE)).
(b) The specific account debited and credited (cash, rent expense, service revenue, etc.).
(c) Whether the specific account is increased (incr.) or decreased (decr).
(d) The normal balance of the specific account.

Use the following format, in which the January 2 transaction is given as an example.

Account Debited Account Credited
(a) (b) (c) (d) (a) (b) (c) (d)
Basic Specific Normal Basic Specific Normal
Date Type Account Effect Balance Type Account Effect Balance
Jan. 2 A Cash Incr. Debit SE Common Incr. Credit
Stock

Ex. 173
For the accounts listed below, indicate if the normal balance of the account is a debit or credit.
Normal Balance
Accounts Debit or Credit

1. Service Revenue

2. Rent Expense

3. Accounts Receivable

4. Accounts Payable

5. Retained Earnings

6. Supplies

7. Insurance Expense

8. Dividends

9. Buildings

10. Notes Payable

Ex. 174
For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance. 1. Notes Payable 2. Prepaid Insurance 3. Salaries and Wages Expense 4. Service Revenue 5. Equipment 6. Common Stock

Ex. 175
During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.

(1) Advertising Expense (6) Dividends
(2) Service Revenue (7) Cash
(3) Accounts Payable (8) Salaries and Wages Expense
(4) Accounts Receivable (9) Notes Payable
(5) Common Stock (10) Insurance Expense

Ex. 176
Eight transactions are recorded in the following T-accounts:
CASH ACCOUNTS RECEIVABLE
(1) 25,000 (2) 3,500 (5) 27,500 (7) 22,500
(7) 22,500 (3) 1,950
(4) 5,100
(6) 8,000
(8) 3,300

SUPPLIES EQUIPMENT
(3) 1,950 (2) 13,500

COMMON STOCK SERVICE REVENUE
(1) 25,000 (5) 27,500

ACCOUNTS PAYABLE DIVIDENDS
(6) 8,000 (2) 10,000 (8) 3,300

SALARIES AND WAGES EXPENSE
(4) 5,100

Ex. 176 (cont.)
Indicate for each debit and each credit: (a) whether an asset, liability, stockholders’ equity, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form:
Account Debited Account Credited
Transaction (a) (b) (a) (b)
No. Type Effect Type Effect
———————————————————————————————————————————
(1) (Example) Asset + Stockholders’
equity +
———————————————————————————————————————————
(2)
———————————————————————————————————————————
(3)
———————————————————————————————————————————
(4)
———————————————————————————————————————————
(5)
———————————————————————————————————————————
(6)
———————————————————————————————————————————
(7)
———————————————————————————————————————————
(8)
———————————————————————————————————————————

Ex. 177
For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example
0. Cash a. Asset account
b. Debit increases, credit decreases
c. Normal balance – debit

Accounts
1. Accounts Payable 5. Service Revenue
2. Accounts Receivable 6. Insurance Expense
3. Common Stock 7. Notes Payable
4. Dividends 8. Equipment

Ex. 178
For each transaction given, enter in the tabulation given below a “D” for debit and a “C” for credit to reflect the increases and decreases of the assets, liabilities, and stockholders’ equity accounts. In some cases there may be a “D” and a “C” in the same box.

Transactions:
1. Invests cash in exchange for stock.
2. Pays insurance in advance for six months.
3. Pays secretary’s salary.
4. Purchases supplies on account.
5. Pays electricity bill.
6. Borrows money from local bank.
7. Makes payment on account.
8. Receives cash due from customers.
Ex. 178 (cont.)
9. Provides services on account.
10. The company pays a dividends.

Transaction #
1 2 3 4 5 6 7 8 9 10
Assets
Liabilities
Common stock
Dividends
Revenues
Expenses

Ex. 179
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.
1. The company issues stock in exchange for $40,000 cash
2. Purchased $400 of supplies on credit.
3. Purchased equipment for $8,000, paying $2,000 in cash and signed a 30-day, $6,000, note payable.
4. Real estate commissions billed to clients amount to $4,000.
5. Paid $700 in cash for the current month’s rent.
6. Paid $200 cash on account for supplies purchased in transaction 2.
7. Received a bill for $600 for advertising for the current month.
8. Paid $2,200 cash for office salaries and wages.
9. The company paid dividends of $1,500.
10. Received a check for $3,000 from a client in payment on account for commissions billed in transaction 4.

Ex. 180
Identify the accounts to be debited and credited for each of the following transactions.
1. Invested $8,000 cash in the business in exchange for stock. 2. Purchased supplies on account for $1,000. 3. Billed customers $2,000 for services performed. 4. Paid salaries of $1,200.

Ex. 181
Transactions for Tom Petty Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations.
1. Invested $40,000 cash in the business in exchange for stock.
2. Purchased land costing $28,000 for cash.
3. Purchased equipment costing $15,000 for $3,000 cash and the remainder on credit.
4. Purchased supplies on account for $800.
5. Paid $1,000 for a one-year insurance policy.
6. Received $3,000 cash for services performed.
7. Received $4,000 for services previously performed on account.
8. Paid wages to employees for $2,500.
9. Paid dividends of $2,000.

Ex. 182
Match the basic step in the recording process described by each of the following statements.

A. Analyze each transaction B. Enter each transaction in a journal C. Transfer journal information to ledger accounts

____ 1. This step is called posting.
____ 2. Business documents are examined to determine the effects of transactions on the accounts.
____ 3. This step is called journalizing.

Ex. 183
Prepare journal entries for each of the following transactions.
1. Performed services for customers on account $8,000.
2. Purchased $20,000 of equipment on account.
3. Received $3,000 from customers in transaction 1.
4. The company paid dividends of $2,000.

Ex. 184
Sigur Ros Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows:
Accounts Payable Prepaid Insurance
Accounts Receivable Prepaid Rent
Accumulated Depreciation Rent Expense
Cash Salaries and Wages Expense
Common Stock Salaries and Wages Payable
Depreciation Expense Service Revenue
Dividends Supplies
Equipment Utilities Expense
Insurance Expense
Instructions
Organize the accounts into the order in which they should appear in the ledger of Sigur Ros Company and assign account numbers. Use the following system to assign account numbers.
1—199 Assets
200—299 Liabilities
300—399 Stockholders’ Equity
400—499 Revenues
500—599 Expenses

Ex. 185
The transactions of Medina Information Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided.

General Journal J1
———————————————————————————————————————————
Date Account Titles and Explanation Ref. Debit Credit
———————————————————————————————————————————
2015
Sept. 1 Cash 25,000
Common Stock 25,000
(Issued stock for cash)

4 Equipment 30,000
Cash 10,000
Notes Payable 20,000
(Paid cash and issued 2-year, 9%, note for
equipment)

8 Rent Expense 1,000
Cash 1,000
(Paid September rent)

15 Prepaid Insurance 400
Cash 400
(Paid one-year liability insurance)

18 Cash 2,500
Service Revenue 2,500
(Received cash for delivery services)

20 Salaries and Wages Expense 500
Cash 500
(Paid salaries for current period)

25 Utilities Expense 100
Accounts Payable 100
(Received a bill for September utilities)

30 Dividends 1,500
Cash 1,500
(Paid dividends)

30 Accounts Receivable 4,000
Service Revenue 4,000
(Billed customer for delivery service)

Ex. 185 (cont.)
General Ledger

Cash Account No. 101
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Accounts Receivable Account No. 112
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Prepaid Insurance Account No. 130
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Equipment Account No. 155
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Accounts Payable Account No. 201
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Ex. 185 (cont.)
Notes Payable Account No. 205
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Common Stock Account No. 311
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Dividends Account No. 332
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Service Revenue Account No. 400
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Rent Expense Account No. 719
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Ex. 185 (cont.)
Salaries and Wages Expense Account No. 726
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

Utilities Expense Account No. 735
———————————————————————————————————————————
Date Explanation Ref. Debit Credit Balance
———————————————————————————————————————————

MEDINA INFORMATION SERVICE
Trial Balance
September 30, 2015
———————————————————————————————————————————
Accounts Debit Credit
———————————————————————————————————————————

———————————————————————————————————————————

Ex. 186
The bookkeeper for Panda Bear Yard Service made a number of errors in journalizing and posting as described below:
1. A debit posting to accounts receivable for $500 was omitted.
2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable.
3. A credit to accounts receivable for $950 was posted as $95.
4. A cash purchase of equipment for $893 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $839 while the debit posting was made for $893.
5. A debit posting of $400 for purchase of supplies was credited to supplies.
6. A debit to maintenance and repairs expense for $451 was posted as $415.
7. A debit posting for salaries and wages expense for $900 was made twice.
8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit to cash for $70.
Ex. 186 (cont.)
Instructions
For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example.
(A) (B) (C)
Error In Balance Difference Larger Column
1 No $500 Credit

Ex. 187
Post the following transactions to T-accounts and determine each account’s ending balance. 1. Supplies 2,800 Accounts Payable 2,800 2. Accounts Receivable 4,000 Service Revenue 4,000
3. Cash 3,000 Accounts Receivable 3,000 4. Accounts Payable 1,000 Cash 1,000

Ex. 188
The trial balance of Red House Painters shown below does not balance.
RED HOUSE PAINTERS
Trial Balance
June 30, 2015
———————————————————————————————————————————
Debit Credit
Cash $ 2,780
Accounts Receivable 7,420
Supplies 600
Equipment 8,300
Accounts Payable $ 9,777
Common Stock 1,952
Dividends 1,300
Service Revenue 15,200
Salaries and Wages Expense 3,800
Maintenance and Repairs Expense 1,600
Totals $25,800 $26,929

An examination of the ledger and journal reveals the following errors:
1. Each of the above listed accounts has a normal balance per the general ledger.
2. Cash of $270 received from a customer on account was debited to Cash $720 and credited to Accounts Receivable $720.
3. A dividend of $400 was posted as a credit to Dividends $400 and credit to Cash $400.
4. A debit of $300 was not posted to Salaries and Wages Expense.
5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700.
6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51.
7. A payment on account for $235 was credited to Cash for $235 and credited to Accounts Payable for $253.

Instructions
Prepare a correct trial balance.

Ex. 189
Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.
1. A payment of $500 to a creditor was recorded by a debit to Accounts Payable of $50 and a credit to Cash of $500.
2. A $480 payment for a printer was recorded by a debit to Equipment of $48 and a credit to Cash for $48.
3. An account receivable in the amount of $2,500 was collected in full. The collection was recorded by a debit to Cash for $2,500 and a debit to Accounts Payable for $2,500.
4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.

Ex. 190
L. Phair and Associates is a financial planning service. The account balances at December 31, 2015 are shown by the following alphabetical list:
Accounts Payable $ 5,000
Accounts Receivable 19,000
Buildings 140,000
Cash 11,700
Common Stock 143,400
Equipment 15,400
Land 42,000
Notes Payable 95,000
Notes Receivable 8,100
Prepaid Insurance 6,400
Supplies 800

Instructions
Prepare a trial balance with the accounts arranged in financial statement order.

Ex. 191
The ledger accounts of the Fabulous Muscles Gym at June 30, 2015 are shown below:

Accounts Payable $ 9,100
Accounts Receivable 1,050
Buildings 43,000
Cash 14,100
Common Stock 62,800
Dividends 10,500
Equipment 42,900
Notes Payable 40,000
Supplies 350

Instructions
Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading.

Ex. 192
The ledger account balances for Galaxie 500 Company are listed below. Accounts Payable $ 6,000 Accounts Receivable 7,000 Cash 5,200 Common Stock 11,000 Dividends 4,000 Salaries and Wages Expense 20,800 Service Revenue 30,000 Unearned Service Revenue 2,000 Utilities Expense 12,000
Instructions
Prepare a trial balance in proper form for Galaxie at December 31, 2015.

Ex 193

The bookkeeper for Antony Johnson Auto Repair made a number of errors in journalizing
and posting, as described below.

1. A credit posting of $500 to Accounts Receivable was omitted.
2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.
3. A collection from a customer of $100 in payment of its account owed was journalized and
posted as a debit to Cash $100 and a credit to Service Revenue $100.
4. A credit posting of $350 to Interest Payable was made twice.
5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25
and a credit to Cash $25.
6. A debit of $685 to Advertising Expense was posted as $658.
Ex. 193 (cont.)
Instructions
For each error:
(a) Indicate whether the trial balance will balance.
(b) If the trial balance will not balance, indicate the amount of the difference.
(c) Indicate the trial balance column that will have the larger total.

Consider each error separately. Use the following form, in which error (1) is given as an example.

(a) (b) (c)
Error In Balance Difference Larger Column
(1) No $500 debit

COMPLETION STATEMENTS

194. An _______________ is a record of increases and decreases in specific assets, liabilities, and stockholders’ items.
195. The process of entering an amount on the left side of an account is called ____________ the account, and making an entry on the right side is called _________________ the account.
196. ______________, _______________, and _______________ have debit normal account balances whereas _______________, ________________, and ________________ have credit normal account balances.
197. The four subdivisions of stockholders’ equity are: ________________, ________________, ________________, and ________________.
198. The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ________________, and transfer the _______________ information to appropriate accounts in the ________________.
199. A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.
200. An accounting record where transactions are initially recorded in chronological order is called a ________________.
201. When three or more accounts are required in one journal entry, the entry is referred to as a ________________ entry.
202. The entire group of accounts and their balances maintained by a company is called the ________________.
203. A two column list of all accounts and their balances at a given time is a ______________.

MATCHING

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

A. Account F. Journal
B. Normal account balance G. Posting
C. Debit H. Chart of accounts
D. Revenue account I. Trial balance
E. Compound entry J. Simple entry

1. An entry that involves three or more accounts.
2. Transferring journal entries to ledger accounts.
3. The side which increases an account.
4. A list of all the accounts used by an enterprise.
5. A record of increases and decreases in specific assets, liabilities, and stockholdersl items.
6. Left side of an account.
7. An entry that involves only two accounts.
8. A book of original entry.
9. A list of accounts and their balances at a given time.
10. Has a credit normal balance

SHORT-ANSWER ESSAY QUESTIONS

S-A E 205
An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance.

S-A E 206
Your roommate, a marketing major, thinks that debit means decrease and credit means increase. And, that every account can be debited and credited and as result, every account can have both a debit and a credit balance. Explain to your roommate (1) the meaning of debit and credit; (2) which accounts can only be debited, which can only be credited, and which can be both debited and credited; and (3) which accounts normally have debit balances and which credit balances.

S-A E 207
A fellow classmate is confused about how debits and credits relate to the basic accounting equation. State the basic accounting equation, convert it into the expanded accounting equation, and then explain how it ties into the rules for debits and credits.

S-A E 208
Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain.

S-A E 209

A classmate who is a computer science major thinks that accountants are obsolete. She states that computers can do the entire process without any human assistance.

Discuss the steps in the recording process and indicate what role the computer plays in that process.

S-A E 210
Amy Pond, a fellow employee, wants to understand the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur.

S-A E 211
All recordable transactions are initially recorded in the journal. Discuss the contributions that the journal makes to the recording process.

S-A E 212

A bookkeeping student has come to you for tutoring on the recording process. She is confused about the relationship between the chart of accounts and the ledger. Explain the purpose of the chart of accounts and the general ledger. In your explanation indicate the relationship between these two items as well.

S-A E 213
The process of transferring the information in the journal to the general ledger is called posting. Explain the posting process, including the importance of the journal page number and the account numbers.

S-A E 214
During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts.
What is your response to this statement? Be brief, yet concise.

S-A E 215 (Ethics)
Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages residential rental properties. Linda Grider is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. Two of the largest expense categories are Travel and Entertainment. Mr. Coleman believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Jim Coleman, Sr. The elder Mr. Coleman has set up Maris Properties in order to test his son’s management skills before allowing him to manage the more lucrative commercial property business. Mr. Coleman, Sr. provided the capital for Maris, and maintains close contact with the company. He allowed his son, however, to hire his own employees.

S-A E 215 (cont.)
Mr. Coleman has asked Ms. Grider to change the names of the Travel and Entertainment Expense accounts to Property Development. He hopes to deflect his father’s attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Grider resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired.

Required:
1. Who are the stakeholders in this situation?
2. Should Ms. Grider agree to the change in the Travel Expense and Entertainment Expense accounts to Property Development? Explain.

S-A E 216 (Communication)
A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits.
a. Can the student be successful in the course without an understanding of the rules of debits and credits?
b. Explain the rules of debits and credits in a way that will help him understand them.

CHALLENGE EXERCISES

CE 1

Presented below is information related to Pickett Real Estate Agency.

Oct. 1 Jeff Pickett begins business as a real estate agent with a cash investment of $30,000 in exchange for common stock.

2 Hires an administrative assistant.

3 Purchases office equipment for $3,500, by paying $500 cash with the balance on account.

6 Sells a house and lot for N. Foster, earning a fee of $6,900 with $900 collected in cash and the balance billed to N. Foster.

27 Pays $1,000 on the balance related to the transaction of October 3.

30 Pays the administrative assistant $2,300 in salary for October.

31 Collects $1,500 of the balance owed by N. Foster.

Instructions

1. Journalize the transactions. (You may omit explanations.)

2. What balance would Pickett Real Estate Agency report for Accounts Payable in its October 31 financial statements? In which category of which financial statements would it be found?

3. What balance would Pickett Real Estate Agency report for Accounts Receivable in its October 31 financial statements? In which category of which financial statements would it be found?

CE 2

Selected transactions for Garver Company during its first month in business are presented below.

Sept. 1 Invested $25,000 cash in the business in exchange for common stock.

5 Purchased equipment for $27,000 paying $6,000 in cash and the balance on account.

11 Performed $3,900 of services for clients, collecting $1,000 cash and billing them for the remainder.

25 Paid $7,000 cash on balance owed for equipment.

30 Declared and paid a $600 cash dividend.

30 Collected $1,200 from the clients from the September 11 transactions.

The Chart of accounts shows: No. 101 Cash, No. 112 Accounts Receivable, No. 157 Equipment, No. 201 Accounts Payable, No. 311 Common Stock, No. 332 Dividends, and No. 400 Service Revenue.

Instructions

(a) Journalize the transactions on page 1 of the journal (Omit explanations).
(b) Post the transactions using the standard account form.
(c) Based only on these transactions, what amount would Garver Company report as total assets in the October 31 balance sheet?
(d) Based only on these transactions, what amount would Garver Company report as total liabilities in the October 31 balance sheet.

CE 3
The accounts in the ledger of Ace Delivery Service contain ithe following balances on July 31, 2015. Accounts Receivable $10,000 Accounts Payable 7,900 Cash ? Common Stock 35,000 Equipment 45,000
Dividends 900 Gasoline Expense 800 Utilities Expense 600 Maintenance and Repair Expense 1,100 Retained Earnings 5,000 Service Revenue 13,000 Salaries and Wages Expense ?
Salaries and Wages Payable 1,000
Supplies 3,000
Unearned Service Revenue 2,500
Notes Payable 22,000
Prepaid Insurance 2,000

Instructions

Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amounts for Cash and Salaries and Wages Expense. Assume net income for the period is $3,500.

CHAPTER 3

ADJUSTING THE ACCOUNTS

CHAPTER LEARNING OBJECTIVES
1. Explain the time period assumption.
2. Explain the accrual basis of accounting
3. Explain the reasons for adjusting entries and identify the major types of adjusting entries.
4. Prepare adjusting entries for deferrals.
5. Prepare adjusting entries for accruals
6. Describe the nature and purpose of an adjusted trial balance.
a7. Prepare adjusting entries for the alternative treatment of deferrals.
a8. Discuss financial reporting concepts.

TRUE-FALSE STATEMENTS
1. Many business transactions affect more than one time period.

2. The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

3. The time period assumption is often referred to as the expense recognition principle.

4. A company’s calendar year and fiscal year are always the same.

5. Accounting time periods that are one year in length are referred to as interim periods.

6. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

7. The cash basis of accounting is not in accordance with generally accepted accounting principles.

8. The expense recognition principle requires that efforts be matched with accomplishments.

9. Expense recognition is tied to revenue recognition.

10. The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.

11. Adjusting entries are not necessary if the trial balance debit and credit column balances are equal.

12. An adjusting entry always involves two balance sheet accounts.

13. Adjusting entries are often made because some business events are not recorded as they occur.

14. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

15. Revenue received before services are performed and expenses paid before being used or consumed are both initially recorded as liabilities.

16. Accrued revenues are revenues which have been received but not yet recognized.

17. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

18. Accumulated Depreciation is a liability account and has a normal credit account balance.

19. A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.

20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

21. Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

22. Asset prepayments become expenses when they expire.

23. A contra asset account is subtracted from a related account in the balance sheet.

24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

25. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

26. Accrued revenues are revenues that have been recognized and received before financial statements have been prepared.

27. Financial statements can be prepared from the information provided by an adjusted trial balance.

a28. The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.

a29. Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

a30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.

a31. To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

a32. Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

a33. Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period.

a34. The quality of consistency pertains to the use of the same accounting principles by firms in the same industry.

a35. The periodicity assumption states that the business will remain in operation for the foreseeable future.

a36. For accounting purposes, business transactions should be kept separate from the personal transactions of the owners of the business.

a37. The economic entity assumption states that economic events can be identified with a particular unit of accountability.

a38. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

a39. The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

a40. A common application of materiality is weighing the factual nature of cost figures versus the relevance of fair value.

Additional True-False Questions

41. The expense recognition principle requires that expenses be matched with revenues.

42. In general, adjusting entries are required each time financial statements are prepared.

43. Every adjusting entry affects one balance sheet account and one income statement account.

44. The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet.

45. Accrued revenues are amounts recorded and received but not yet recognized.

46. An adjusted trial balance should be prepared before the adjusting entries are made.

a47. When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.

MULTIPLE CHOICE QUESTIONS
48. Monthly and quarterly time periods are called
a. calendar periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.

49. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the company’s accounts can only be made in the time period when the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

50. An accounting time period that is one year in length, but does not begin on January 1, is referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.

51. Adjustments would not be necessary if financial statements were prepared to reflect net income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.

52. Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly

53. The time period assumption is also referred to as the
a. calendar assumption.
b. cyclicity assumption.
c. periodicity assumption.
d. fiscal assumption.

54. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts
a. is increased.
b. is decreased.
c. is unaffected.
d. depends on if there is a profit or loss.

55. Which of the following is not a common time period chosen by businesses as their accounting period?
a. Daily
b. Monthly
c. Quarterly
d. Annually

56. Which of the following time periods would not be referred to as an interim period?
a. Monthly
b. Quarterly
c. Semi-annually
d. Annually

57. The fiscal year of a business is usually determined by
a. the IRS.
b. a lottery.
c. the business.
d. the SEC.

58. Which of the following is in accordance with generally accepted accounting principles?
a. Accrual-basis accounting
b. Cash-basis accounting
c. Both accrual-basis and cash-basis accounting
d. Neither accrual-basis nor cash-basis accounting

59. The revenue recognition principle dictates that revenue should be recognized in the accounting records
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.

60. In a service-type business, revenue is considered recognized
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.

61. The expense recognition principle matches
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.

62. Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was recognized?
a. July 31
b. August 1
c. August 5
d. August 6

63. A company spends $15 million dollars for an office building. Over what period should the cost be written off?
a. When the $15 million is expended in cash.
b. All in the first year.
c. Over the useful life of the building.
d. After $15 million in revenue is recognized.

64. The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. owner withdrawals should be matched with owner contributions.
d. cash payments should be matched with cash receipts.

65. A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be recognized?
a. December 5.
b. December 10.
c. November 30.
d. December 1.

66. A candy factory’s employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in
a. February.
b. March.
c. the period when the workers receive their checks.
d. either in February or March depending on when the pay period ends.

67. Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period?
a. Due from Employees.
b. Due to Employer.
c. Salaries and Wages Payable.
d. Salaries and Wages Expense.

68. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company’s financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

69. Adjusting entries are required
a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.

70. Which one of the following is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the next three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.

71. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of accounting.

72. The following is selected information from Motley Corporation for the fiscal year ending October 31, 2015.
Cash received from customers $300,000
Revenue recognized 375,000
Cash paid for expenses 180,000
Cash paid for computers on November 1, 2014 that will be used
for 3 years (annual depreciation is $16,000) 48,000
Expenses incurred, including interest, but excluding any depreciation 220,000
Proceeds from a bank loan, part of which was used to pay for
the computers 100,000
Based on the accrual basis of accounting, what is Motley Corporation’s net income for the year ending October 31, 2015?
a. $72,000.
b. $104,000.
c. $139,000.
d. $155,000.

73. Crue Company had the following transactions during 2015:
• Sales of $4,800 on account
• Collected $2,000 for services to be performed in 2016
• Paid $1,625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2016

What is Crue’s 2015 net income using accrual accounting?
a. $2,925.
b. $3,175.
c. $4,925.
d. $5,175.

74. Crue Company had the following transactions during 2015:
• Sales of $4,500 on account
• Collected $2,500 for services to be performed in 2016
• Paid $1,625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2016

What is Crue’s 2015 net income using cash basis accounting?
a. $625.
b. $875.
c. $5,125.
d. $5,375.

75. A small company may be able to justify using a cash basis of accounting if they have
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.

76. Adjusting entries are required
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company’s profits are below the budget.
c. when expenses are recorded in the period in which they are incurred.
d. when revenues are recorded in the period in which services are performed.

77. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed.
b. Adjusting entries are necessary to ensure that the expense recognition principle is followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

78. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.

79. The preparation of adjusting entries is
a. straight forward because the accounts that need adjustment will be out of balance.
b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.

80. If a resource has been consumed but a bill has not been received at the end of the accounting period, then
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.

81. Accounts often need to be adjusted because
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can’t decide what they want to report.

82. Adjusting entries are
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.

83. Expenses incurred but not yet paid or recorded are called
a. prepaid expenses.
b. accrued expenses.
c. interim expenses.
d. unearned expenses.

84. A law firm received $3,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

85. Adjusting entries can be classified as
a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.

86. Accrued revenues are
a. cash received and a liability recorded before services are performed.
b. revenue for services performed and recorded as liabilities before they are received.
c. revenue for services performed but not yet received in cash or recorded.
d. revenue for services performed and already received in cash and recorded.

87. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

88. Accrued expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

89. Unearned revenues are
a. cash received and a liability recorded before services are performed.
b. revenue for services performed and recorded as liabilities before they are received.
c. revenue for services performed but not yet received in cash or recorded.
d. revenue for services performed and already received in cash and recorded.

90. A liability—revenue relationship exists with
a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.

91. Which of the following reflects the balances of prepayment accounts prior to adjustment?
a. Balance sheet accounts are understated and income statement accounts are understated.
b. Balance sheet accounts are overstated and income statement accounts are overstated.
c. Balance sheet accounts are overstated and income statement accounts are understated.
d. Balance sheet accounts are understated and income statement accounts are overstated.

92. An asset—expense relationship exists with
a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.

93. Lake of Fire Company purchased supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $1,900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be
a. Debit Supplies Expense, $1,900; Credit Supplies, $1,900.
b. Debit Supplies, $5,100; Credit Supplies Expense, $5,100.
c. Debit Supplies Expense, $5,100; Credit Supplies, $5,100.
d. Debit Supplies, $1,900; Credit Supplies Expense, $1,900.

94. If an adjustment is needed for unearned revenues, the
a. liability and related revenue are overstated before adjustment.
b. liability and related revenue are understated before adjustment.
c. liability is overstated and the related revenue is understated before adjustment.
d. liability is understated and the related revenue is overstated before adjustment.

95. The balance in the supplies account on June 1 was $5,200, supplies purchased during June were $3,500, and the supplies on hand at June 30 were $3,000. The amount to be used for the appropriate adjusting entry is
a. $3,500.
b. $5,700.
c. $6,500.
d. $11,700.

96. Depreciation expense for a period is the
a. original cost of an asset – accumulated depreciation.
b. book value of the asset ÷ useful life.
c. portion of an asset’s cost that expired during the period.
d. market value of the asset ÷ useful life.

97. Accumulated Depreciation is
a. an expense account.
b. a stockholders’ equity account.
c. a liability account.
d. a contra asset account.

98. Meat Puppets Company purchased equipment for $7,200 on December 1. It is estimated that annual depreciation on the equipment will be $1,800. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:
a. Debit Depreciation Expense, $1,800; Credit Accumulated Depreciation, $1,800.
b. Debit Depreciation Expense, $150; Credit Accumulated Depreciation, $150.
c. Debit Depreciation Expense, $5,400; Credit Accumulated Depreciation, $5,400.
d. Debit Equipment, $7,200; Credit Accumulated Depreciation, $7,200.

99. REM Real Estate received a check for $27,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $27,000. Financial statements will be prepared on July 31. REM Real Estate should make the following adjusting entry on July 31:
a. Debit Unearned Rent Revenue, $4,500; Credit Rent Revenue, $4,500.
b. Debit Rent Revenue, $4,500; Credit Unearned Rent Revenue, $4,500.
c. Debit Unearned Rent Revenue, $27,000; Credit Rent Revenue, $24,000.
d. Debit Cash, $27,000; Credit Rent Revenue, $27,000.

100. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.

101. A company usually determines the amount of supplies used during a period by
a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for during the period.
d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

102. If a company fails to make an adjusting entry to record supplies expense, then
a. stockholders’ equity will be understated.
b. expense will be understated.
c. assets will be understated.
d. net income will be understated.

103. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $18,500, and unexpired amounts per analysis of policies of $6,000?
a. Debit Insurance Expense, $6,000; Credit Prepaid Insurance, $6,000.
b. Debit Insurance Expense, $18,500; Credit Prepaid Insurance, $18,500.
c. Debit Prepaid Insurance, $12,500; Credit Insurance Expense, $12,500.
d. Debit Insurance Expense, $12,500; Credit Prepaid Insurance, $12,500.

104. At December 31, 2015, before any year-end adjustments, Murmur Company’s Insurance Expense account had a balance of $2,450 and its Prepaid Insurance account had a balance of $3,800. It was determined that $2,800 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be
a. $2,450.
b. $3,450.
c. $2,800.
d. $5,250.

105. Depreciation is the process of
a. valuing an asset at its fair value.
b. increasing the value of an asset over its useful life in a rational and systematic manner.
c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
d. writing down an asset to its real value each accounting period.

106. A new accountant working for Spirit Walker Company records $900 Depreciation Expense on store equipment as follows:
Dr. Depreciation Expense 900
Cr. Cash 900
The effect of this entry is to
a. adjust the accounts to their proper amounts on December 31.
b. understate total assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understate the book value of the depreciable assets as of December 31.

107. From an accounting standpoint, the acquisition of productive facilities can be thought of as a long-term
a. accrual of expense.
b. accrual of revenue.
c. accrual of unearned revenue.
d. prepayment for services.

108. The balance in the Prepaid Rent account before adjustment at the end of the year is $21,000, which represents three months’ rent paid on December 1. The adjusting entry required on December 31 is to
a. debit Rent Expense, $7,000; credit Prepaid Rent, $7,000.
b. debit Rent Expense, $14,000; credit Prepaid Rent $14,000.
c. debit Prepaid Rent, $7,000; credit Rent Expense, $7,000.
d. debit Prepaid Rent, $14,000; credit Rent Expense, $14,000.

109. An accumulated depreciation account
a. is a contra-liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance.

110. The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the
a. market value of the asset.
b. blue book value of the asset.
c. book value of the asset.
d. depreciated difference of the asset.

111. Book value is also referred to as
a. accumulated depreciation.
b. carrying value.
c. fair value.
d. original cost.

112. Which of the following would not result in unearned revenue?
a. Rent collected in advance from tenants
b. Services performed on account
c. Sale of season tickets to football games
d. Sale of two-year magazine subscriptions

113. If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit
a. Cash.
b. Prepaid Rent.
c. Unearned Rent Revenue.
d. Rent Revenue.

114. Unearned revenue is classified as
a. an asset account.
b. a revenue account.
c. a contra-revenue account.
d. a liability account.

115. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be
a. debit Unearned Service Revenue and credit Cash.
b. debit Unearned Service Revenue and credit Service Revenue.
c. debit Unearned Service Revenue and credit Prepaid Expense.
d. debit Unearned Service Revenue and credit Accounts Receivable.

116. Dreamtime Laundry purchased $7,000 worth of supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the supplies indicated only $1,000 on hand. The adjusting entry that should be made by the company on June 30 is
a. Debit Supplies Expense, $1,000; Credit Supplies, $1,000.
b. Debit Supplies, $1,000; Credit Supplies Expense, $1,000.
c. Debit Supplies, $6,000; Credit Supplies Expense, $6,000.
d. Debit Supplies Expense, $6,000; Credit Supplies, $6,000.

117. On July 1, Runner’s Sports Store paid $14,000 to Corona Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Runner’s Sports Store is
a. Debit Rent Expense, $14,000; Credit Prepaid Rent, $3,500.
b. Debit Prepaid Rent, $3,500; Credit Rent Expense, $3,500.
c. Debit Rent Expense, $3,500; Credit Prepaid Rent, $3,500.
d. Debit Rent Expense, $14,000; Credit Prepaid Rent, $14,000.

118. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30
a. is not required. No adjusting entries will be made until the end of the season in November.
b. will include a debit to Cash and a credit to Ticket Revenue for $60,000.
c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $90,000.
d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $80,000.

119. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Ticket Revenue at October 31 is
a. $0.
b. $60,000.
c. $90,000.
d. $150,000.

120. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Ticket Revenue balance that will be reported on the December 31 balance sheet will be
a. $0.
b. $90,000.
c. $150,000.
d. $240,000.

121. At March 1, 2015, Minutemen Corp. had supplies on hand of $500. During the month, Minutemen purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal entry should include a
a. debit to the supplies account for $1,500.
b. credit to the supplies account for $500.
c. debit to the supplies account for $1,200.
d. credit to the supplies account for $1,500.

122. Double Nickels Company purchased equipment for $9,000 on January 1, 2015. The company expects to use the equipment for 3 years. It has no salvage value. Monthly depreciation expense on the asset is
a. $0.
b. $250.
c. $3,000.
d. $9,000.

123. Husker Du Supplies Inc. purchased a 12-month insurance policy on March 1, 2015 for $1,800. At March 31, 2015, the adjusting journal entry to record expiration of this asset will include a
a. debit to Prepaid Insurance and a credit to Cash for $1,800.
b. debit to Prepaid Insurance and a credit to Insurance Expense for $200.
c. debit to Insurance Expense and a credit to Prepaid Insurance for $150.
d. debit to Insurance Expense and a credit to Cash for $150.

124. Mary Chain Investments purchased an 18-month insurance policy on May 31, 2015 for $3,600. The December 31, 2015 balance sheet would report Prepaid Insurance of
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $1,400.
c. $2,200.
d. $3,600.

125. At March 1, Psychocandy Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $750 and consumed supplies of $800. If no adjusting entry is made for supplies
a. stockholders’ equity will be overstated by $800.
b. expenses will be understated by $750.
c. assets will be understated by $250.
d. net income will be understated by $800.

126. Pixies Inc. pays its rent of $54,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true?
a. Failure to make the adjustment does not affect the February financial statements.
b. Expenses will be overstated by $4,500 and net income and stockholders’ equity will be understated by $4,500.
c. Assets will be overstated by $9,000 and net income and stockholders’ equity will be understated by $9,000.
d. Assets will be overstated by $4,500 and net income and stockholders’ equity will be overstated by $4,500.

127. On January 1, 2014, Doolittle Company purchased furniture for $7,560. The company expects to use the furniture for 3 years. The asset has no salvage value. The book value of the furniture at December 31, 2015 is
a. $0.
b. $2,520.
c. $5,040.
d. $7,560.

128. On January 1, 2014, Mudhoney Inc. purchased equipment for $45,000. The company is depreciating the equipment at the rate of $750 per month. At January 31, 2015, the balance in Accumulated Depreciation is
a. $750.
b. $9,000.
c. $9,750.
d. $35,250.

129. On January 1, 2015, Superfuzz Company purchased equipment for $40,000. The company is depreciating the equipment at the rate of $800 per month. The book value of the equipment at December 31, 2015 is
a. $0.
b. $9,600.
c. $30,400.
d. $40,000.

130. Ultramega Company collected $19,600 in May of 2015 for 4 months of service which would take place from October of 2015 through January of 2016. The revenue reported from this transaction during 2015 would be
a. 0.
b. $4,900.
c. $14,700.
d. $19,600.

131. Soundgarden Company collected $18,200 in May of 2015 for 5 months of service which would take place from October of 2015 through February of 2016. The revenue reported from this transaction during 2015 would be
a. $0.
b. $7,280.
c. $10,920.
d. $18,200.

132. Sonic Youth Corporation purchased a one-year insurance policy in January 2015 for $49,500. The insurance policy is in effect from March 2015 through February 2016. If the company neglects to make the proper year-end adjustment for the expired insurance
a. net income and assets will be understated by $41,250.
b. net income and assets will be overstated by $41,250.
c. net income and assets will be understated by $8,250.
d. net income and assets will be overstated by $8,250.

133. Dinosaur Junior Corporation purchased a one-year insurance policy in January 2015 for $75,000. The insurance policy is in effect from May 2015 through April 2016. If the company neglects to make the proper year-end adjustment for the expired insurance
a. net income and assets will be understated by $50,000.
b. net income and assets will be overstated by $50,000.
c. net income and assets will be understated by $25,000.
d. net income and assets will be overstated by $25,000.

134. If an adjusting entry is not made for an accrued revenue,
a. assets will be overstated.
b. expenses will be understated.
c. stockholders’ equity will be understated.
d. revenues will be overstated.

135. If an adjusting entry is not made for an accrued expense,
a. expenses will be overstated.
b. liabilities will be understated.
c. net income will be understated.
d. stockholders’ equity will be understated.

136. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities.
d. an overstatement of expenses and an overstatement of liabilities.

137. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause
a. net income to be overstated.
b. an understatement of assets and an understatement of revenues.
c. an understatement of revenues and an understatement of liabilities.
d. an understatement of revenues and an overstatement of liabilities.

138. Sebastian Belle has performed $2,000 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Sebastian make?
a. Debit Cash and credit Unearned Service Revenue
b. Debit Accounts Receivable and credit Unearned Service Revenue
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Unearned Service Revenue and credit Service Revenue

139. Sebastian Belle, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Sebastian make upon receipt of the payments?
a. Debit Unearned Service Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue

140. NWA Air Charter signed a four-month note payable in the amount of $20,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is
a. $150.
b. $200.
c. $600.
d. $1,800.

141. Uncle Tupelo’s Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $75,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?
a. Interest Expense 1,500
Interest Payable 1,500
b. Interest Expense 2,250
Interest Payable 2,250
c. Interest Expense 1,500
Cash 1,500
d. Interest Expense 1,500
Notes Payable 1,500

142. Stone Roses Candies paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $1,500 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January?
a. Salaries and Wages Expense 1,500
Salaries and Wages Payable 1,500
b. Salaries and Wages Expense 7,500
Salaries and Wages Payable 7,500
c. Salaries and Wages Expense 4,500
Salaries and Wages Payable 4,500
d. No adjusting entry is required.

143. A company shows a balance in Salaries and Wages Payable of $38,000 at the end of the month. The next payroll amounting to $48,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?
a. Salaries and Wages Expense 48,000
Salaries and Wages Payable 48,000
b. Salaries and Wages Expense 48,000
Cash 48,000
c. Salaries and Wages Expense 10,000
Cash 10,000
d. Salaries and Wages Expense 10,000
Salaries and Wages Payable 38,000
Cash 48,000

144. A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is
a. debit Salaries and Wages Payable, $24,000; credit Cash, $24,000.
b. debit Salaries and Wages Expense, $24,000; credit Cash, $24,000.
c. debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable, $24,000.
d. debit Salaries and Wages Expense, $6,000; credit Salaries and Wages Payable, $6,000.

145. SurferRosa Music Store borrowed $30,000 from the bank signing a 9%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be
a. Debit Interest Expense, $2,700; Credit Interest Payable, $2,700.
b. Debit Interest Expense, $225; Credit Interest Payable, $225.
c. Debit Notes Payable, $2,700; Credit Cash, $2,700.
d. Debit Cash, $675; Credit Interest Payable, $675.

146. Nirvana Corporation issued a one-year, 9%, $400,000 note on April 30, 2015. Interest expense for the year ended December 31, 2015 was
a. $21,000.
b. $24,000.
c. $27,000.
d. $36,000.

147. Yo La Corporation issued a one-year, 6%, $100,000 note on August 31, 2015. Interest expense for the year ended December 31, 2015 was
a. $6,000.
b. $2,500.
c. $2,000.
d. $1,500.

148. Employees at Tengo Corporation are paid $15,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salaries and wages expense should be recorded two days later on January 2?
a. $15,000
b. $9,000
c. $6,000
d. None, matching requires the weekly salary to be accrued on December 31.

149. Can financial statements be prepared directly from the adjusted trial balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.

150. The adjusted trial balance is prepared
a. after financial statements are prepared.
b. before the trial balance.
c. to prove the equality of total assets and total liabilities.
d. after adjusting entries have been journalized and posted.

151. An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.

152. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.

a 153. Sebadoah is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Sebadoah purchased $1,500 of supplies in January and his inventory at the end of January shows $300 of supplies remaining. What adjusting entry should Sebadoah make on January 31?
a. Supplies Expense 300
Supplies 300
b. Supplies Expense 1,500
Cash 1,500
c. Supplies 300
Supplies Expense 300
d. Supplies Expense 1,200
Supplies 1,200

a 154. Alternative adjusting entries do not apply to
a. accrued revenues and accrued expenses.
b. prepaid expenses.
c. unearned revenues.
d. prepaid expenses and unearned revenues.

a 155. Elliott Smith is a lawyer who requires that his clients pay him in advance of legal services rendered. Elliott routinely credits Service Revenue when his clients pay him in advance. In June Elliott collected $15,000 in advance fees and completed 70% of the work related to these fees. What adjusting entry is required by Elliott’s firm at the end of June?
a. Unearned Service Revenue 10,500
Service Revenue 10,500
b. Unearned Service Revenue 4,500
Service Revenue 4,500
c. Cash 15,000
Service Revenue 15,000
d. Service Revenue 4,500
Unearned Service Revenue 4,500

a 156. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, the failure to make an adjusting entry will cause
a. assets to be understated.
b. assets to be overstated.
c. expenses to be understated.
d. contra-expenses to be overstated.

a 157. If unearned revenues are initially recorded in revenue accounts and not all the related services been performed at the end of the accounting period, the failure to make an adjusting entry will cause
a. liabilities to be overstated.
b. revenues to be understated.
c. revenues to be overstated.
d. accounts receivable to be overstated.

a158. On January 2, 2015, Superchunk purchased a general liability insurance policy for $2,700 for coverage for the calendar year. The entire $2,700 was charged to Insurance Expense on January 2, 2015. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2015, will be:
a. Insurance Expense 2,475
Prepaid Insurance 2,475
b. Prepaid Insurance 2,475
Insurance Expense 2,475
c. Insurance Expense 225
Prepaid Insurance 225
d. Prepaid Insurance 225
Insurance Expense 225

a 159. If accounting information has relevance, it is useful in making predictions about
a. future tax audits.
b. new accounting principles.
c. foreign currency exchange rates.
d. the future events of a company.

a 160. Which one of the following is not an enhancing quality of useful information?
a. Timeliness
b. Understandability
c. Materiality
d. Comparability

a 161. All of the following are characteristics of accounting information except
a. faithful representation.
b. comparability.
c. relevance.
d. flexibility.

a 162. The two fundamental qualities of useful information are
a. verifiability and timeliness.
b. relevance and faithful representation.
c. comparability and flexibility.
d. understandability and consistency.

a 163. Relevant accounting information
a. is information that has been audited.
b. must be reported within the operating cycle or one year, whichever is longer.
c. has been objectively determined.
d. is information that is capable of making a difference in a business decision.

a 164. Characteristics associated with relevant accounting information are
a. comparability and timeliness.
b. predictive value and confirmatory value.
c. neutral and verifiable.
d. consistency and understandability.

a 165. Characteristics associated with faithfully representative accounting information are
a. verifiable and timely.
b. neutral and verifiable.
c. complete and neutral.
d. relevance and verifiable.

a 166. Which of the following statements is not true?
a. Comparability means using the same accounting principles from year to year within a company.
b. Faithful representation is the quality of information that gives assurance that it is free from error.
c. Relevant accounting information must be capable of making a difference in the decision.
d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decision.

a167. An item is considered material if
a. it doesn’t cost a lot of money.
b. it is of a tangible good.
c. it is likely to influence the decision of an investor or creditor.
d. the cost of reporting the item is greater than its benefits.

a168. A company using the same accounting principles from year to year is an application of
a. timeliness.
b. consistency.
c. full disclosure.
d. materiality.

a 169. Which of the following is a constraint in accounting?
a. Comparability.
b. Cost.
c. Consistency.
d. Relevance.

a 170. The periodicity assumption states that the economic life of a business can be divided into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.

a 171. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?
a. Monetary unit assumption.
b. Economic entity assumption.
c. Periodicity assumption.
d. Going concern assumption.

a 172. The economic entity assumption states that economic events
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the IASB.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of every entity can be separately identified and accounted for.

a 173. Which of the following is not an accounting assumption?
a. Integrity.
b. Going concern.
c. Periodicity.
d. Economic entity.

a 174. The periodicity assumption states
a. the business will remain in operation for the foreseeable future.
b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.
c. every economic entity can be separately identified and accounted for.
d. only those things that can be expressed in money are included in the accounting records.

a175. Valuing assets at their fair value rather than at their cost is inconsistent with the:
a. economic entity assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principles.

a 176. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency

Additional Multiple Choice Questions

177. Which of the following statements concerning accrual-basis accounting is incorrect?
a. Accrual-basis accounting follows the revenue recognition principle.
b. Accrual-basis accounting is the method required by generally accepted accounting principles.
c. Accrual-basis accounting recognizes expenses when they are paid.
d. Accrual-basis accounting follows the expense recognition principle.

178. The revenue recognition principle dictates that revenue be recognized in the accounting period
a. before it is earned.
b. after it is earned.
c. in which the performance obligation is satisfied.
d. in which it is collected.

179. An expense is recorded under the cash basis only when
a. services are performed.
b. it is earned.
c. cash is paid.
d. it is incurred.

180. For prepaid expense adjusting entries
a. an expense—liability account relationship exists.
b. prior to adjustment, expenses are overstated and assets are understated.
c. the adjusting entry results in a debit to an expense account and a credit to an asset account.
d. none of these answer choices are correct.

181. Expenses paid and recorded as assets before they are used are called
a. accrued expenses.
b. interim expenses.
c. prepaid expenses.
d. unearned expenses.

182. Buffalo Tom Cruises purchased a five-year insurance policy for its ships on April 1, 2015 for $60,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2015 is
a. Prepaid Insurance 9,000
Insurance Expense 9,000
b. Insurance Expense 9,000
Prepaid Insurance 9,000
c. Insurance Expense 12,000
Prepaid Insurance 12,000
d. Insurance Expense 3,000
Prepaid Insurance 3,000

183. Pavement Company purchased a truck from Bee Thousand Corp. by issuing a 6-month, 8% note payable for $90,000 on November 1. On December 31, the accrued expense adjusting entry is
a. No entry is required.
b. Interest Expense 7,200
Interest Payable 7,200
c. Interest Expense 3,600
Interest Payable 3,600
d. Interest Expense 1,200
Interest Payable 1,200

184. If the adjusting entry for depreciation is not made,
a. assets will be understated.
b. stockholders’ equity will be understated.
c. net income will be understated.
d. expenses will be understated.

185. Ryan Adams, an employee of Heartbreaker Corp., will not receive his paycheck until April 2. Based on services performed from March 15 to March 31, his salary was $1,000. The adjusting entry for Heartbreaker Corp. on March 31 is
a. Salaries and Wages Expense 1,000
Salaries and Wages Payable 1,000
b. No entry is required.
c. Salaries and Wages Expense 1,000
Cash 1,000
d. Salaries and Wages Payable 1,000
Cash 1,000

186. Which of the following statements related to the adjusted trial balance is incorrect?
a. It shows the balances of all accounts at the end of the accounting period.
b. It is prepared before adjusting entries have been made.
c. It proves the equality of the total debit balances and the total credit balances in the ledger.
d. Financial statements can be prepared directly from the adjusted trial balance.

187. Financial statements are prepared directly from the
a. general journal.
b. ledger.
c. trial balance.
d. adjusted trial balance.

188. Accrual-basis accounting is allowed under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.

189. Cash-basis accounting is allowed under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.

190. The time period assumption is used under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.

191. IFRS requires that companies present
a. a complete set of financial statement, including comparative information, annually.
b. only a statement of financial position, including comparative information, annually.
c. only an income statement, including comparative information, annually.
d. only a statement of changes in cash flows, including comparative information, annually.

192. Revenue recognition under IFRS is
a. substantially different from revenue recognition under GAAP.
b. generally the same as revenue recognition under GAAP, but with more detailed guidance.
c. generally the same as revenue recognition under GAAP, but with less detailed guidance.
d. exactly the same as revenue recognition under GAAP.

193. Revenue recognition fraud is
a. a major issue in the U.S. but not worldwide.
b. a major issue internationally, but not in the U.S.
c. a major issue in the U.S. and worldwide.
d. not a major issue anywhere.

194. The IFRS standard dealing specifically with revenue recognition is based on
a. whether the revenue is realized or realizable.
b. whether the revenue is earned.
c. whether the revenue is realized or realizable, and earned.
d. the probability that economic benefits will flow to the company, and reliability of measurement.

195. Depreciation based on revaluation of land and buildings is permitted under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.

196. Under IFRS, income is defined as
a. revenue less expenses.
b. revenues and gains, less expenses and losses.
c. revenues and gains.
d. revenues, gains, and contributions by owners.

197. The procedures of the closing process are applicable to all companies when they are using
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.

BRIEF EXERCISES
BE 198
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE).
1. Unrecorded interest on savings bonds is $245.
2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300.
3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned.
4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired.

BE 199
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $900 for the accounting period.
2. There was no beginning balance of supplies and purchased $500 of supplies during the period. At the end of the period $150 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 was unexpired.

BE 200
On June 1, during its first month of operations, Crooked Rain purchased supplies for $4,500 and debited the supplies account for that amount. At June 30, an inventory of supplies showed $1,000 of supplies on hand. What adjusting journal entry should be made for June?

BE 201
On January 1, Chan & Chan, CPAs received a $15,000 cash retainer for accounting services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized equally over the 3-month period, what adjusting journal entry should be made at January 31?

BE 202
On February 1, Results Income Tax Service received a $3,000 cash retainer for tax preparation services to be rendered equally over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized equally over the 4-month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue?

BE 203
Bakesale Enterprises purchased equipment on May 1, 2015 for $6,300. The company expects to use the equipment for 5 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $1,260)?
2. What is the book value of the equipment at May 31, 2015?

BE 204
Rhodes National purchased software on October 1, 2015 for $14,400. The company expects to use the software for 3 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is $4,800)
2. What balance will be reported on the December 31, 2015 balance sheet for Accumulated Depreciation?

BE 205
Teenage Fanclub Printings sold annual subscriptions to their magazine for $30,000 in December, 2014. The magazine is published monthly. The new subscribers received their first magazine in January, 2015.
1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability?
2. What amount will be reported on the January 2015 balance sheet for Unearned Subscription Revenue?

BE 206
On January 1, 2015, Bottle Rockets Corp. purchased a general liability insurance policy for $9,000 to provide coverage for the calendar year.

1. If the company recorded the policy as an asset when purchased, what is the monthly adjusting journal entry that should be recorded at January 31, 2015?
*2. If the company expensed the cost of the policy on January 1, 2015, what is the monthly adjusting entry that should be recorded at January 31, 2015?

BE 207
Identify the impact on the balance sheet if the following information is not used to adjust the accounts.
1. Supplies consumed totaled $3,000.
2. Interest accrues on notes payable at the rate of $200 per month.
3. Insurance of $450 expired during the month.
4. Plant and equipment are depreciated at the rate of $1,200 per month.

BE 208
Determine the impact on the balance sheet accounts if the following information is not used to adjust the accounts of Mood Food Company for the month of January, 2015. Round answers to the nearest dollar.
1. The company rents extra office space to Beulah, CPAs. Beulah pays the $6,000 rent annually on January 1.
2. The company has an outstanding loan to its President in the amount of $150,000. The loan accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2017.
3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $3,100.

BE 209
For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA).
_____ 1. Failure to record revenue recognized but not yet received.
_____ 2. Failure to record expired prepaid rent.
_____ 3. Failure to record accrued interest on the bank savings account.
_____ 4. Failure to record depreciation.
_____ 5. Failure to record accrued wages.
_____ 6. Failure to record the recognized portion of unearned revenues.

BE 210
Blue Guitar Music School borrowed $30,000 from the bank signing an 8%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)?

BE 211
The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2015 includes the following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Notes Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service Revenue, $19,600; Salaries and Wages Expense, $6,000; Supplies, $200; Supplies Expense, $1,200; Salaries and Wages Payable, $600. Prepare an income statement for the month of December.

BE 212
The adjusted trial balance of Old 97 Automotive Service Company on June 30, 2015 includes the following accounts: Supplies, $300; Accumulated Depreciation, $9,500; Salaries Payable, $1,550, Notes Payable $6,750; Service Revenue, $22,100; Salaries and Wages Expense, $8,750; Depreciation Expense, $3,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June.

BE 213
The adjusted trial balance of Sodajerk Company at December 31, 2015 includes the following accounts: Retained Earnings $12,600; Dividends $7,000; Service Revenue $38,000; Salaries and Wages Expense $13,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $2,500; and Depreciation Expense $2,000. Prepare a retained earnings statement for the year.

BE 214
The adjusted trial balance of Hanson Hawk Company at September 30, 2015 includes the following accounts: Retained Earnings $27,700; Dividends $9,750; Service Revenue $46,800; Insurance Expense $1,950; Salaries Expense $18,000; Rent Expense $3,000; Supplies Expense $650; and Depreciation Expense $1,100. Prepare a retained earnings statement for the year.

aBE 215
The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below.

a. Confirmatory value e. Faithful representation
b. Neutral f. Timely
c. Predictive value g. Verifiable
d. Relevant

_____ 1. Accounting information that is not biased toward one position or another.
_____ 2. Providing information before it loses its capacity to influence decision.
_____ 3. Independent measures, using the same methods, obtain similar results.
_____ 4. Providing information that would make a difference in a business decision.
_____ 5. Provide information that accurately depicts what really happened.
_____ 6. Confirms or corrects prior decisions.

LO 8, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

aBE 216
Presented below are the basic assumptions and principles underlying financial statements.

a. Historical cost principle d. Going concern assumption
b. Economic entity assumption e. Monetary unit assumption
c. Full disclosure principle f. Periodicity assumption

Identify the basic assumption or principle that is described below.

_____ 1. The economic life of a business can be divided into artificial time periods.
_____ 2. The business will continue in operation long enough to carry out its existing objectives.
_____ 3. Assets should be recorded at their cost.
_____ 4. Economic events can be identified with a particular unit of accountability.
_____ 5. Circumstances and events that make a difference to financial statement users should be disclosed.
_____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records.

EXERCISES
Ex. 217
The balance sheets of Red House Painters include the following:
12/31/15 12/31/14
Interest Receivable $0 $4,300
Supplies 3,000 5,000
Salaries and Wages Payable 3,800 5,600
Unearned Service Revenue 4,000 -0-

The income statement for 2015 shows the following:
Interest Revenue $18,400
Service Revenue 72,700
Supplies Expense 8,700
Salaries and Wages Expense 39,000

Instructions
Calculate the following for 2015:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for revenue.

Ex. 218
Hal Corp. prepared the following income statement using the cash basis of accounting:

HAL CORP.
Income Statement, Cash Basis
For the Year Ended December 31, 2015

Service revenue (does not include $25,000 of services rendered on account
because the collection will not be until 2016) $370,000
Expenses (does not include $15,000 of expenses on account because
payment will not be made until 2016) 220,000
Net income $150,000

Additional data:
1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above.
2. On January 1, 2015, paid for a two-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above.

Instructions
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.

Ex. 219
Before month-end adjustments are made, the February 28 trial balance of Neutral Milk Hotel contains revenue of $7,000 and expenses of $4,400. Adjustments are necessary for the following items:
• Depreciation for February is $1,800.
• Revenue recognized but not yet billed is $2,700.
• Accrued interest expense is $700.
• Revenue collected in advance that is now recognized is $2,500.
• Portion of prepaid insurance expired during February is $400.
Instructions
Calculate the correct net income for Neutral Milk Hotel’s Income Statement for February.

Ex. 220
On December 31, 2015, Fashion Nugget Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $35,000. The balance sheet showed total assets, $115,000; total liabilities, $45,000; and stockholders’ equity, $70,000.
The data for the three adjusting entries were:
(1) Depreciation of $10,000 was not recorded on equipment.
(2) Wages amounting to $7,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.
(3) Rent of $12,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.

Ex. 220 (cont.)
Instructions
Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses):
Item Net Income Total Assets Total Liabilities Stockholders’ Equity
Incorrect balances $ 35,000 $115,000 $ 45,000 $ 70,000
Effects of:
Depreciation
Wages
Rent
Correct Balances

Ex. 221
Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following:
1. Supplies of $200 have been used. 2. Salaries of $600 are unpaid. 3. Rent received in advance totaling $300 has been earned. 4. Services provided but not recorded total $500.

Ex. 222
Buena Vista Social Club accumulates the following adjustment data at December 31.
1. Revenue of $1,600 collected in advance has been recognized.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $500 has expired.
4. Supplies of $450 have been used.
5. Revenue recognized but unbilled total $750.
6. Utility expenses of $250 are unpaid.
7. Interest of $300 has accrued on a note payable.

Instructions
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement).
4. The adjusting entry.

(b) Assume net income before the adjustments listed above was $15,500. What is the adjusted net income?

Prepare your answer in the tabular form presented below.

Account Balances
Before Adjustment
Type of Account (Understatement
Adjustment Relationship or Overstatement) Adjusting Entry

Ex. 223
The adjusted trial balance of the Victoria Lane Paving Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry.
(a) (b)
Balance Sheet Account Type of Adjusting Entry Related Account
1. Supplies
2. Accounts Receivable
3. Prepaid Insurance
4. Accumulated Depreciation—
Equipment
5. Interest Payable
6. Salaries and Wages Payable
7. Unearned Revenue

Ex. 224
Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
STATEMENTS:

1. A revenue not yet recognized; collected in advance.

2. Office supplies on hand that will be used in the next period.

3. Interest revenue collected; not yet recognized.

4. Rent not yet collected; already recognized.

5. An expense incurred; not yet paid or recorded.

6. A revenue recognized; not yet collected or recorded.

7. An expense not yet incurred; paid in advance.

8. Interest expense incurred; not yet paid.

Ex. 225
The Shins, a minor league baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions:
(a) Paid $210,000 to Kansas City as advance rent for use of Kansas City Stadium for the six month period April 1 through September 30.
(b) Collected $450,000 cash from sales of season tickets for the team’s 20 home games. This amount was credited to Unearned Ticket Revenue.

During the month of April, the Shins played four home games and five road games.

Instructions
Prepare the adjusting entries required at April 30 for the transactions above.

Ex. 226
On July 1, 2015, Damlen Jurado Company pays $12,000 to its insurance company for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Damlen Jurado on July 1 and December 31.

Ex. 227
On July 1, 2015, Jeffrey Underwriters Associates received $8,000 from a client for a 2-year insurance policy.
Instructions Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and December 31.
Ex. 228
Mother Hips Garment Company purchased equipment on June 1 for $90,000, paying $20,000 cash and signing a 9%, 2-month note for the remaining balance. The equipment is expected to depreciate $18,000 each year. Mother Hips Garment Company prepares monthly financial statements.

Instructions
(a) Prepare the general journal entry to record the acquisition of the equipment on June 1st.
(b) Prepare any adjusting journal entries that should be made on June 30th.
(c) Show how the equipment will be reflected on Mother Hips Garment Company’s balance sheet on June 30th.

Ex. 229
Scotsman Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September.
SCOTSMAN COMPANY
Trial Balance (Selected Accounts)
September 30, 2015
———————————————————————————————————————————
Debit Credit
Supplies $ 3,200
Prepaid Insurance 4,800
Equipment 16,200
Accumulated Depreciation—Equipment $1,000
Unearned Rent Revenue 1,200
(Note: Debit column does not equal credit column because this is a partial listing of selected account balances)

An analysis of the account balances by the company’s accountant provided the following additional information:
1. A physical count of supplies revealed $1,000 on hand on September 30.
2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Equipment depreciated $3,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $500.

Instructions
Using the above additional information, prepare the adjusting entries that should be made by Scotsman Company on September 30.

Ex. 230
Prepare the required end-of-period adjusting entries for each independent case listed below.

Case 1
Sleater-Kinney Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $7,400 worth of supplies had been used during the year. No adjusting entry has been made until year end.

Case 2
Western Company has a calendar year-end accounting period. On July 1, the company purchased equipment for $30,000. It is estimated that the equipment will depreciate $300 each month. No adjusting entry has been made until year end.

Case 3
Ranch Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $900 per month apartments and one tenant in the $1,200 per month apartment had not paid their August rent as of August 31st.

Ex. 231
Aeroplane Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.
AEROPLANE INSURANCE AGENCY
Income Statement
For the Month Ended June 30
———————————————————————————————————————————
Revenues
Sales revenue $35,000
Expenses
Salaries and wages expense $6,000
Rent expense 4,200
Depreciation expense 2,800
Advertising expense 800
Total expenses 13,800
Net income $21,200
Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information:
1. A utility bill for $2,500 was received on the last day of the month for electric and gas service for the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of $25,000. The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $4,000 in cash and $2,200 of supplies were on hand at June 30.
4. The agency purchased a new car at the beginning of the month for $22,000 cash. The car will depreciate $5,400 per year.
5. Salaries owed to employees at the end of the month total $6,100. The salaries will be paid on July 5.
Instructions
Prepare a correct income statement.

Ex. 232
One part of eight adjusting entries is given below.

Instructions
Indicate the account title for the other part of each entry.
1. Unearned Service Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense is debited.
5. Salaries and Wages Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Supplies Expense is debited.

Ex. 233
For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry.
1. Depreciation Expense
2. Salaries and Wages Payable
3. Service Revenue
4. Supplies
5. Unearned Service Revenue

Ex. 234
Prepare the necessary adjusting entry for each of the following:
1. Services provided but unrecorded totaled $700. 2. Accrued salaries at year-end are $1,000. 3. Depreciation on equipment for the year is $600.

Ex. 235
The following ledger accounts are used by the Sebastopol Dog Track:
Accounts Receivable
Prepaid Advertising
Prepaid Rent

Unearned Ticket Revenue

Advertising Expense
Rent Expense

Ticket Revenue
Sales Revenue

Instructions
For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year.
(a) On September 1, paid rent on the track facility for three months, $210,000.
(b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $900,000.
(c) On September 1, borrowed $350,000 from First National Bank by issuing a 9% note payable due in three months.
(d) On September 5, programs for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,600.
(e) The accountant for the concessions company reported that gross receipts for September were $150,000. Ten percent is due to the track and will be remitted by October 10.

Ex. 236
Gwynn Company has an accounting fiscal year which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred.
Date Amount
Monday June 28 $3,000
Tuesday June 29 3,800
Wednesday June 30 3,300
Thursday July 1 3,500
Friday July 2 2,400

Instructions
(a) Prepare any necessary adjusting journal entries that should be made at year end on June 30.
(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.

Ex. 237
On Friday of each week, Spoon Company pays its factory personnel weekly wages amounting to $45,000 for a five-day work week.

Instructions
(a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.
(b) Prepare the journal entry for payment of the week’s wages on the payday which is Friday, January 2 of the next year.

Ex. 238
Presented below is the Trial Balance and Adjusted Trial Balance for Morning Jacket Company on December 31.
MORNING JACKET
Trial Balance
December 31
———————————————————————————————————————————
Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 2,000 $ 2,000
Accounts Receivable 2,800 3,800
Prepaid Rent 2,100 1,400
Supplies 1,200 650
Equipment 18,000 18,000
Accumulated depreciation—
Equipment $ 1,300 $ 1,550
Accounts Payable 2,700 2,700
Notes Payable 10,000 10,000
Interest Payable 140
Salaries and Wages Payable 1,270
Unearned Service Revenue 4,460 3,960
Common Stock 7,200 7,200
Dividends 3,200 3,200
Service Revenue 8,000 9,500
Salaries and Wages Expense 3,860 5,130
Rent Expense 500 1,200
Supplies Expense 550
Depreciation Expense—
Equipment 250
Interest Expense 140
Totals $33,660 $33,660 $36,320 $36,320

Instructions
Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Ex. 239
Compute the net income for 2015 based on the following amounts presented on the adjusted trial balance of D-Lay Company.
Accumulated Depreciation – Equip. $20,000 Depreciation Expense 18,000 Salaries and Wages Expense 15,000 Service Revenue 40,000 Unearned Service Revenue 8,000

Ex. 240
New Slang Pest Control has the following balances in selected accounts on December 31, 2014.
Accounts Receivable $ 0
Accumulated Depreciation – Equipment 0
Equipment 6,650
Interest Payable 0
Notes Payable 20,000
Prepaid Insurance 2,220
Salaries and Wages Payable 0
Supplies 2,940
Unearned Service Revenue 30,000
All of the accounts have normal balances. The information below has been gathered at December 31, 2015.
1. Depreciation on the equipment for 2015 is $1,300.
2. New Slang Pest Control borrowed $20,000 by signing a 10%, one-year note on July 1, 2015.
3. New Slang Pest Control paid $2,220 for 12 months of insurance coverage on October 1, 2015.
4. New Slang Pest Control pays its employees total salaries of $11,000 every Monday for the preceding 5-day week (Monday-Friday). On Monday, December 27, 2015, employees were paid for the week ending December 24, 2015. All employees worked the five days ending December 31, 2015.
5. New Slang Pest Control performed disinfecting services for a client in December 2015. The client will be billed $3,200.
6. On December 1, 2015, New Slang Pest Control collected $30,000 for disinfecting processes to be performed from December 1, 2015, through May 31, 2015.
7. A count of supplies on December 31, 2015, indicates that supplies of $850 are on hand.

Instructions
Prepare in journal form with explanations, the adjusting entries for the seven items listed for New Slang Pest Control.

Ex. 241
The trial balances before and after adjustments for Old Julian Calendars at the end of its fiscal year are presented below.
Old Julian Calendars
Trial Balance
September 31, 2014
———————————————————————————————————————————
Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 15,080 $ 15,080
Accounts Receivable 14,960 16,110
Supplies 2,760 885
Prepaid Insurance 5,800 1,450
Equipment 13,300 13,300
Accumulated Depreciation – Equip $ 5,220 $ 6,960
Accounts Payable 9,860 9,860
Salaries and Wages Payable 4,500
Unearned Sales Revenue 2,175 1,150
Unearned Rent Revenue 2,100 525
Common Stock 18,395 18,395
Sales Revenue 48,800 50,975
Rent Revenue 1,575 3,150
Salaries and Wages Expense 36,225 40,725
Supplies Expense 1,875
Insurance Expense 0 4,350
Depreciation Expense 0 0 1,740 0
$ 88,125 $ 88,125 $ 95,515 $ 95,515
Ex. 241 Cont’d

Instructions
Prepare the adjusting entries that were made.

Ex. 242
The White Stripes Animal Encounters operates a drive through tourist attraction. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:

Prepaid Rent $16,000
Buildings 30,000
Accumulated Depreciation—Buildings 6,600
Unearned Ticket Revenue 600

Other data:
1. Three months’ rent had been prepaid on April 1.
2. The buildings are being depreciated at $7,200 per year.
3. The unearned ticket revenue represents tickets sold for future visits. The tickets were sold at $5.00 each on April 1. During April, thirty of the tickets were used by customers.

Instructions
(a) Calculate the following:
1. Monthly rent expense.
2. The age of the buildings in months.
3. The number of tickets sold on April 1.
(b) Prepare the adjusting entries that were made by the White Stripes Animal Encounters on April 30.

Ex. 243
The adjusted trial balance of C.S. Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31, 2015:
1. an income statement.
2. a retained earnings statement.
3. a balance sheet.

C.S. Financial Planners
Adjusted Trial Balance
December 31, 2015
———————————————————————————————————————————
Debit Credit
Cash $ 4,900
Accounts Receivable 2,200
Supplies 1,800
Equipment 15,000
Accumulated Depreciation—Equipment $ 4,000
Accounts Payable 3,300
Unearned Service Revenue 6,000
Common Stock 10,000
Retained Earnings 4,400
Dividends 2,500
Service Revenue 4,200
Supplies Expense 600
Depreciation Expense 2,500
Rent Expense 2,400
$31,900 $31,900

Ex. 244
Yankee Hotel Foxtrot initiated operations on July 1, 2015. To manage the company officers and managers have requested monthly financial statements starting July 31, 2015. The adjusted trial balance amounts at July 31 are shown below.
Debits Credits
Cash $ 7,680 Accumulated Depreciation – Equipment $ 840
Accounts Receivable 810 Notes Payable 6,000
Prepaid Rent 1,965 Accounts Payable 2,140
Supplies 1,160 Salaries and Wages Payable 360
Equipment 11,400 Interest Payable 40
Dividends 800 Unearned Service Revenue 580
Salaries and Wages Expense 7,145 Common Stock 5,000
Rent Expense 2,740 Retained Earnings 5,640
Depreciation Expense 665 Service Revenue 14,390
Supplies Expense 580 Total credits $34,990
Interest Expense 45
Total debits $ 34,990

(a) Determine the net income for the month of July.
(b) Determine the total assets and total liabilities at July 31, 2015 for Yankee Hotel Foxtrot.
(c) Determine the amount that appears for Retained Earnings at July 31, 2015.

aEx. 245

1. Drive-by Truckers prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional supplies were purchased for $4,800 and that amount was debited to Supplies Expense. On July 31, a physical count of supplies revealed that there was $2,000 on hand. Prepare the adjusting journal entry that Drive-by Truckers should make on July 31.

2. Alesandro Rental Agency prepares monthly financial statements. On September 1, a check for $9,000 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30.

COMPLETION STATEMENTS
246. The ______________ assumption divides the economic life of a business into artificial time periods.

247. An accounting period that is one year in length is referred to as a ______________ year.

248. The ______________ principle gives accountants guidance as to when revenue is to be recorded.

249. In a service company, revenue is recognized when the service is ______________.

250. The expense recognition principle attempts to match ______________ with ______________.

251. Expenses paid and recorded in an asset account before they are used or consumed are called ______________. Revenue received and recorded as a liability before it is recognized is referred to as ______________.

252. Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated.

253. Depreciation is a ______________ allocation process rather than a process of ______________.

254. Depreciation expense for a period is an ______________ rather than a factual measurement of cost that has expired.

255. An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been ________________ but has not yet been ________________ or recorded.

256. An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.

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

A. Time period assumption F. Accrued revenues
B. Fiscal year G. Depreciation
C. Revenue recognition principle H. Accumulated depreciation
D. Prepaid expenses I. Accrued expenses
E. Expense recognition principle J. Book value

1. A twelve month accounting period
2. Expenses paid before they are incurred
3. Cost less accumulated depreciation
4. Divides the economic life of a business into artificial time periods
5. Efforts are related to accomplishments
6. A contra asset account
7. Recognition of revenue when the performance obligation is satisfied
8. Revenues recognized but not yet received
9. Expenses incurred but not yet paid
10. A cost allocation process

SHORT-ANSWER ESSAY QUESTIONS
S-A E 258
The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement.

S-A E 259
In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each.

S-A E 260
You are visiting with a friend, Jim Borke, who wants to start a new business. During discussions on forming the business, Jim makes this statement:
Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting?

Prepare a response for Jim.

S-A E 261
The long-term liability section of Escovedo Company’s Balance Sheet includes the following accounts:
Notes Payable $100,000
Mortgage Payable 250,000
Salaries and Wages Payable 75,000
Accumulated Depreciation 125,000
Total Long-Term Liabilities $550,000
Escovedo Company is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities.

S-A E 262 (Ethics)
Jay Farrar Company is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Jay Farrar introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success.

The success of the product has Josh Ritter, the manager of the New Products division, worried, however. He was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. He did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. He preferred to complete testing of the pen first, so that more confidence could be placed in the results.

Top management, however, declined the tests. Mr. Ritter then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable.

Required:
1. Describe the alternatives that you as an accountant would have in this situation.
2. Indicate which alternative is best.

S-A E 263 (Communication)
A new sales representative, Jiggs Lucero, has just received his copy of the month-end financial reports. He is puzzled by the term “unearned revenue.” He left the following e-mail message for you on the company’s bulletin board system:

What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn’t … Right??! Is this how you guys lower our commissions? Reply to j.lucero@sbd

Required:
Write a response to send to Jiggs.

CHALLENGE EXERCISES
CE 1
O’Brien Industries collected $190,000 from customers in 2015. Of the amount collected, $40,000 was from revenue accrued from services performed in 2014, and $20,000 was received in advance for 2016 revenue. In addition, O’Brien earned $70,000 of revenue in 2015, which will not be collected until 2016. O’Brien also earned $25,000 of revenue in 2015 which had been collected in 2014.
O’Brien Industries paid $150,000 for expenses in 2015. Of the amount paid, $50,000 was for expenses incurred on account in 2014, $22,000 was paid in advance for 2016 expenses. In addition, O’Brien incurred $78,000 of expenses in 2015, which will not be paid until 2016. O’Brien also incurred $29,000 of expenses in 2015 which had been paid in 2014.

Instructions
(a) Compute 2015 cash-basis net income.
(b) Compute 2015 accrual-basis net income.

CE 2
The ledger of Laurie Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared
Debit Credit
Prepaid Insurance $6,000
Supplies 4,500
Equipment 40,000
Accumulated Depreciation–Equipment $12,600
Notes Payable 20,000
Unearned Rent Revenue 14,100
Rent Revenue 90,000
Interest expense -0-
Salaries and Wages Expense 20,000
An analysis of the accounts shown the following.
1. The equipment depreciates $400 per month.
2. Two-thirds of the unearned rent revenue was recognized during the quarter.
3. The note payable is dated January 1 and bears 12% interest.
CE 2 (Cont.)
4. Suppliers on hand total $800.
5. The insurance policy is a two-year policy dated January 1.

Instructions
A. Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
B. Compute the ending balances for Prepaid Insurance, Supplies, Unearned Rent Revenue, and Rent Revenue, and indicate in which financial statement those items will be reported.

CE 3
The income statement of Annette Co, for the month of July shows net income of $2,400 based on Service Revenue $7,200, Salaries and Wages Expense $2,900 Supplies Expense $1,400, and Utilities Expense $500.In reviewing the statement, you discover the following.
1. Insurance expired during July of $600 was omitted.
2. Supplies expense includes $300 of supplies that are still on hand at July 31.
3. Depreciation on equipment of $250 was omitted.
4. Accrued but unpaid salaries and wages at July 31 of $400 were not included.
5. Services performed but unrecorded totaled $700.

CE 3 (Cont.)
Instructions
A. Prepare a correct income statement for July 2015.
B. What effect do the corrections have on the amount reported as total assets on the balance sheet?
C. What effect do the corrections have on the amount reported as total liabilities on the balance sheet?

CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

CHAPTER Learning OBJECTIVES
1. Prepare a worksheet.
2. Explain the process of closing the books
3. Describe the content and purpose of a post-closing trial balance.
4. State the required steps in the accounting cycle
5. Explain the approaches to preparing correcting entries.
6. Identify the sections of a classified balance sheet.
a7. Prepare reversing entries.

TRUE-FALSE STATEMENTS
1. A worksheet is a mandatory form that must be prepared along with an income statement and balance sheet.

2. If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.

3. If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.

4. It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.

5. The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.

6. The adjusted trial balance columns of a worksheet are obtained by subtracting the adjustment columns from the trial balance columns.

7. The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.

8. Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.

9. The dividends account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.

10. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

11. Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.

12. Closing the dividends account to Retained Earnings is not necessary if net income is greater than dividends during the period.

13. The dividends account is a permanent account whose balance is carried forward to the next accounting period.

14. Closing entries are journalized after adjusting entries have been journalized.

15. The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.

16. The post-closing trial balance is entered in the first two columns of a worksheet.

17. A business entity has only one accounting cycle over its economic existence.

18. The accounting cycle begins at the start of a new accounting period.

19. Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account.

20. Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.

21. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated.

22. In a corporation, Retained Earnings is a part of stockholders’ equity.

23. A company’s operating cycle and fiscal year are usually the same length of time.

24. Cash and supplies are both classified as current assets.

25. Long-term investments would appear in the property, plant, and equipment section of the balance sheet.

26. A liability is classified as a current liability if the company is to pay it within the forthcoming year.

27. A company’s liquidity is concerned with the relationship between long-term investments and long-term debt.

28. Current assets are customarily the first items listed on a classified balance sheet.

29. The operating cycle of a company is determined by the number of years the company has been operating.

a30. Reversing entries are an optional bookkeeping procedure.

31. After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.

32. To close net income to retained earnings, Income Summary is debited and Retained Earnings is credited.

33. In one closing entry, Dividends is credited and Income Summary is debited.

34. The post-closing trial balance will contain only retained earnings statement accounts and balance sheet accounts.

35. The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.

36. Current assets are listed in the order of liquidity.

37. Current liabilities are obligations that the company is to pay within the coming year.

MULTIPLE CHOICE QUESTIONS
38. Preparing a worksheet involves
a. two steps.
b. three steps.
c. four steps.
d. five steps.

39. The adjustments entered in the adjustments columns of a worksheet are
a. not journalized.
b. posted to the ledger but not journalized.
c. not journalized until after the financial statements are prepared.
d. journalized before the worksheet is completed.

40. The information for preparing a trial balance on a worksheet is obtained from
a. financial statements.
b. general ledger accounts.
c. general journal entries.
d. business documents.

41. After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the
a. adjusted trial balance.
b. post-closing trial balance.
c. the general journal.
d. adjustments columns of the worksheet.

42. If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has
a. earned net income for the period.
b. an error because debits do not equal credits.
c. suffered a net loss for the period.
d. to make an adjusting entry.

43. A worksheet is a multiple column form that facilitates the
a. identification of events.
b. measurement process.
c. preparation of financial statements.
d. analysis process.

44. Which of the following companies would be least likely to use a worksheet to facilitate the adjustment process?
a. Large company with numerous accounts
b. Small company with numerous accounts
c. All companies, since worksheets are required under generally accepted accounting principles
d. Small company with few accounts

45. A worksheet can be thought of as a(n)
a. permanent accounting record.
b. optional device used by accountants.
c. part of the general ledger.
d. part of the journal.

46. The account, Supplies, will appear in the following debit columns of the worksheet.
a. Trial balance
b. Adjusted trial balance
c. Balance sheet
d. All of these answer choices are correct

47. When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet?
a. They should be inserted in alphabetical order into the trial balance accounts already given.
b. They should be inserted in chart of account order into the trial balance already given.
c. They should be inserted on the lines immediately below the trial balance totals.
d. They should not be inserted on the trial balance until the next accounting period.

48. When using a worksheet, adjusting entries are journalized
a. after the worksheet is completed and before financial statements are prepared.
b. before the adjustments are entered on to the worksheet.
c. after the worksheet is completed and after financial statements have been prepared.
d. before the adjusted trial balance is extended to the proper financial statement columns.

49. Assuming that there is a net loss for the period, debits equal credits in all but which section of the worksheet?
a. Income statement columns
b. Adjustments columns
c. Trial balance columns
d. Adjusted trial balance columns

50. Adjusting entries are prepared from
a. source documents.
b. the adjustments columns of the worksheet.
c. the general ledger.
d. last year’s worksheet.

51. The net income (or loss) for the period
a. is found by computing the difference between the income statement credit column and the balance sheet credit column on the worksheet.
b. cannot be found on the worksheet.
c. is found by computing the difference between the income statement columns of the worksheet.
d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.

52. The worksheet does not show
a. net income or loss for the period.
b. revenue and expense account balances.
c. the ending balance in the retained earnings account.
d. the trial balance before adjustments.

53. If the total debits exceed total credits in the balance sheet columns of the worksheet, stockholders’ equity
a. will increase because net income has occurred.
b. will decrease because a net loss has occurred.
c. is in error because a mistake has occurred.
d. will not be affected.

54. The income statement and balance sheet columns of Iron and Wine Company’s worksheet reflect the following totals:

Income Statement Balance Sheet
Dr. Cr. Dr. Cr.
Totals $72,000 $44,000 $60,000 $88,000

The net income (or loss) for the period is
a. $44,000 income.
b. $28,000 income.
c. $28,000 loss.
d. not determinable.

55. The income statement and balance sheet columns of Iron and Wine Company’s worksheet reflect the following totals:

Income Statement Balance Sheet
Dr. Cr. Dr. Cr.
Totals $72,000 $48,000 $60,000 $84,000

To enter the net income (or loss) for the period into the above worksheet requires an entry to the
a. income statement debit column and the balance sheet credit column.
b. income statement credit column and the balance sheet debit column.
c. income statement debit column and the income statement credit column.
d. balance sheet debit column and the balance sheet credit column.

56. Closing entries are necessary for
a. permanent accounts only.
b. temporary accounts only.
c. both permanent and temporary accounts.
d. permanent or real accounts only.

57. Each of the following accounts is closed to Income Summary except
a. Expenses.
b. Dividends.
c. Revenues.
d. All of these are closed to Income Summary.

58. Closing entries are made
a. in order to terminate the business as an operating entity.
b. so that all assets, liabilities, and stockholders’ equity accounts will have zero balances when the next accounting period starts.
c. in order to transfer net income (or loss) and dividends to the retained earnings account.
d. so that financial statements can be prepared.

59. Closing entries are
a. an optional step in the accounting cycle.
b. posted to the ledger accounts from the worksheet.
c. made to close permanent or real accounts.
d. journalized in the general journal.

60. The income summary account
a. is a permanent account.
b. appears on the balance sheet.
c. appears on the income statement.
d. is a temporary account.

61. If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a
a. debit to the retained earnings account.
b. debit to the dividends account.
c. credit to the retained earnings account.
d. credit to the dividends account.

62. Closing entries are journalized and posted
a. before the financial statements are prepared.
b. after the financial statements are prepared.
c. at management’s discretion.
d. at the end of each interim accounting period.

63. Closing entries
a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.

64. Which of the following is a true statement about closing the books of a corporation?
a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the dividends account are closed to the Income Summary account.

65. Closing entries may be prepared from all of the following except
a. Adjusted balances in the ledger
b. Income statement and balance sheet columns of the worksheet
c. Balance sheet
d. Income and retained earnings statements

66. In order to close the dividends account, the
a. income summary account should be debited.
b. income summary account should be credited.
c. retained earnings account should be credited.
d. retained earnings account should be debited.

67. In preparing closing entries
a. each revenue account will be credited.
b. each expense account will be credited.
c. the retained earnings account will be debited if there is net income for the period.
d. the dividends account will be debited.

68. The most efficient way to accomplish closing entries is to
a. credit the income summary account for each revenue account balance.
b. debit the income summary account for each expense account balance.
c. credit the dividends balance directly to the income summary account.
d. credit the income summary account for total revenues and debit the income summary account for total expenses.

69. The closing entry process consists of closing
a. all asset and liability accounts.
b. out the retained earnings account.
c. all permanent accounts.
d. all temporary accounts.

70. The final closing entry to be journalized is typically the entry that closes the
a. revenue accounts.
b. dividends account.
c. retained earnings account.
d. expense accounts.

71. An error has occurred in the closing entry process if
a. revenue and expense accounts have zero balances.
b. the retained earnings account is credited for the amount of net income.
c. the dividends account is closed to the retained earnings account.
d. the balance sheet accounts have zero balances.

72. The Income Summary account is an important account that is used
a. during interim periods.
b. in preparing adjusting entries.
c. annually in preparing closing entries.
d. annually in preparing correcting entries.

73. The balance in the income summary account before it is closed will be equal to
a. the net income or loss on the income statement.
b. the beginning balance in the retained earnings account.
c. the ending balance in the retained earnings account.
d. zero.

74. After closing entries are posted, the balance in the retained earnings account in the ledger will be equal to
a. the beginning retained earnings reported on the retained earnings statement.
b. the amount of the retained earnings reported on the balance sheet.
c. zero.
d. the net income for the period.

75. The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information:
Revenues $7,000
Expenses:
Salaries and Wages Expense $3,000
Rent Expense 1,500
Advertising Expense 800
Supplies Expense 300
Insurance Expense 100
Total expenses 5,700
Net income $1,300

The entry to close the revenue account includes a
a. debit to Income Summary for $1,300.
b. credit to Income Summary for $1,300.
c. debit to Income Summary for $7,000.
d. credit to Income Summary for $7,000.

76. The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information:
Revenues $7,000
Expenses:
Salaries and Wages Expense $3,000
Rent Expense 1,500
Advertising Expense 800
Supplies Expense 300
Insurance Expense 100
Total expenses 5,700
Net income $1,300

The entry to close the expense accounts includes a
a. debit to Income Summary for $1,300.
b. credit to Rent Expense for $1,500.
c. credit to Income Summary for $5,700.
d. debit to Salaries and Wages Expense for $3,000.

77. The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information:
Revenues $7,000
Expenses:
Salaries and Wages Expense $3,000
Rent Expense 1,500
Advertising Expense 800
Supplies Expense 300
Insurance Expense 100
Total expenses 5,700
Net income $1,300

After the revenue and expense accounts have been closed, the balance in Income Summary will be
a. $0.
b. a debit balance of $1,300.
c. a credit balance of $1,300.
d. a credit balance of $7,000.

78. The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information:
Revenues $7,000
Expenses:
Salaries and Wages Expense $3,000
Rent Expense 1,500
Advertising Expense 800
Supplies Expense 300
Insurance Expense 100
Total expenses 5,700
Net income $1,300

The entry to close Income Summary to Retained Earnings includes
a. a debit to Revenues for $7,000.
b. credits to Expenses totalling $5,700.
c. a credit to Income Summary for $1,300
d. a credit to Retained Earnings for $1,300.

79. The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information:
Revenues $7,000
Expenses:
Salries and Wages Expense $3,000
Rent Expense 1,500
Advertising Expense 800
Supplies Expense 300
Insurance Expense 100
Total expenses 5,700
Net income $1,300

At June 1, 2015, Camera Obscura reported retained earnings of $35,000. The company had no dividends during June. At June 30, 2015, the company will report retained earnings of
a. $29,300.
b. $35,000.
c. $36,300.
d. $42,000.

80. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

The entry to close the revenue account includes a
a. debit to Income Summary for $7,500.
b. credit to Income Summary for $7,500.
c. debit to Revenues for $70,000.
d. credit to Revenues for $70,000.

81. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

The entry to close the expense accounts includes a
a. debit to Income Summary for $7,500.
b. credit to Income Summary for $7,500.
c. debit to Income Summary for $77,500.
d. debit to Utilities Expense for $2,500.

82. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

After the revenue and expense accounts have been closed, the balance in Income Summary will be
a. $0.
b. a debit balance of $7,500.
c. a credit balance of $7,500.
d. a credit balance of $70,000.

83. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

The entry to close Income Summary to Retained Earnings includes
a. a debit to Revenue for $70,000.
b. credits to Expenses totalling $77,500.
c. a credit to Income Summary for $7,500.
d. a credit to Retained Earnings for $7,500.

84. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

At January 1, 2015, Fugazi reported retained earnings of $50,000. Dividends for the year totalled $10,000. At December 31, 2015, the company will report retained earnings of
a. $17,500.
b. $32,500.
c. $40,000.
d. $42,500.

85. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

After all closing entries have been posted, the Income Summary account will have a balance of
a. $0.
b. $7,500 debit.
c. $7,500 credit.
d. $77,500 credit.

86. The income statement for the year 2015 of Fugazi Co. contains the following information:
Revenues $70,000
Expenses:
Salaries and Wages Expense $45,000
Rent Expense 12,000
Advertising Expense 10,000
Supplies Expense 6,000
Utilities Expense 2,500
Insurance Expense 2,000
Total expenses 77,500
Net income (loss) $ (7,500)

After all closing entries have been posted, the revenue account will have a balance of
a. $0.
b. $70,000 credit.
c. $70,000 debit.
d. $7,500 credit.

87. A post-closing trial balance is prepared
a. after closing entries have been journalized and posted.
b. before closing entries have been journalized and posted.
c. after closing entries have been journalized but before the entries are posted.
d. before closing entries have been journalized but after the entries are posted.

88. All of the following statements about the post-closing trial balance are correct except it
a. shows that the accounting equation is in balance.
b. provides evidence that the journalizing and posting of closing entries have been properly completed.
c. contains only permanent accounts.
d. proves that all transactions have been recorded.

89. A post-closing trial balance will show
a. only permanent account balances.
b. only temporary account balances.
c. zero balances for all accounts.
d. the amount of net income (or loss) for the period.

90. A post-closing trial balance should be prepared
a. before closing entries are posted to the ledger accounts.
b. after closing entries are posted to the ledger accounts.
c. before adjusting entries are posted to the ledger accounts.
d. only if an error in the accounts is detected.

91. A post-closing trial balance will show
a. zero balances for all accounts.
b. zero balances for balance sheet accounts.
c. only balance sheet accounts.
d. only income statement accounts.

92. The purpose of the post-closing trial balance is to
a. prove that no mistakes were made.
b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period.
c. prove the equality of the income statement account balances that are carried forward into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.

93. The balances that appear on the post-closing trial balance will match the
a. income statement account balances after adjustments.
b. balance sheet account balances after closing entries.
c. income statement account balances after closing entries.
d. balance sheet account balances after adjustments.

94. Which account listed below would be double ruled in the ledger as part of the closing process?
a. Cash
b. Retained Earnings
c. Dividends
d. Accumulated Depreciation—Equipment

95. A double rule applied to accounts in the ledger during the closing process implies that
a. the account is a temporary account.
b. the account is a balance sheet account.
c. the account balance is not zero.
d. a mistake has been made, since double ruling is prescribed.

96. The heading for a post-closing trial balance has a date line that is similar to the one found on
a. a balance sheet.
b. an income statement.
c. a retained earnings statement.
d. the worksheet.

97. Which one of the following is usually performed only at the end of a company’s annual accounting period?
a. Preparing financial statements
b. Journalizing and posting adjusting entries
c. Journalizing and posting closing entries
d. Preparing an adjusted trial balance

98. The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is
a. analyzing transactions.
b. journalizing and posting adjusting entries.
c. preparing a post-closing trial balance.
d. posting to ledger accounts.

99. Which one of the following is an optional step in the accounting cycle of a business enterprise?
a. Analyze business transactions
b. Prepare a worksheet
c. Prepare a trial balance
d. Post to the ledger accounts

100. The final step in the accounting cycle is to prepare
a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.

101. Which of the following steps in the accounting cycle would not generally be performed daily?
a. Journalize transactions
b. Post to ledger accounts
c. Prepare adjusting entries
d. Analyze business transactions

102. Which of the following steps in the accounting cycle may be performed most frequently?
a. Prepare a post-closing trial balance
b. Journalize closing entries
c. Post closing entries
d. Prepare a trial balance

103. Which of the following depicts the proper sequence of steps in the accounting cycle?
a. Journalize the transactions, analyze business transactions, prepare a trial balance
b. Prepare a trial balance, prepare financial statements, prepare adjusting entries
c. Prepare a trial balance, prepare adjusting entries, prepare financial statements
d. Prepare a trial balance, post to ledger accounts, post adjusting entries

104. The two optional steps in the accounting cycle are preparing
a. a post-closing trial balance and reversing entries.
b. a worksheet and post-closing trial balances.
c. reversing entries and a worksheet.
d. an adjusted trial balance and a post-closing trial balance.

105. The first required step in the accounting cycle is
a. reversing entries.
b. journalizing transactions in the book of original entry.
c. analyzing transactions.
d. posting transactions.

106. Correcting entries
a. always affect at least one balance sheet account and one income statement account.
b. affect income statement accounts only.
c. affect balance sheet accounts only.
d. may involve any combination of accounts in need of correction.

107. Merriweather Post Pavillion received a $820 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $280 and a credit to Service Revenue $280. The correcting entry is
a. debit Cash, $820; credit Accounts Receivable, $820.
b. debit Cash, $540 and Accounts Receivable, $280; credit Service Revenue, $820.
c. debit Cash, $540 and Service Revenue, $280; credit Accounts Receivable, $820.
d. debit Accounts Receivable, $820; credit Cash, $540 and Service Revenue, $280.

108. If errors occur in the recording process, they
a. should be corrected as adjustments at the end of the period.
b. should be corrected as soon as they are discovered.
c. should be corrected when preparing closing entries.
d. cannot be corrected until the next accounting period.

109. A correcting entry
a. must involve one balance sheet account and one income statement account.
b. is another name for a closing entry.
c. may involve any combination of accounts.
d. is a required step in the accounting cycle.

110. An unacceptable way to make a correcting entry is to
a. reverse the incorrect entry.
b. erase the incorrect entry.
c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts.
d. correct it immediately upon discovery.

111. Zen Arcade paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $47,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $27,000 had been accrued at year end on December 31. The correcting entry is
a. Salaries and Wages Payable 27,000
Cash 27,000
b. Cash 20,000
Salaries and Wages Expense 20,000
c. Salaries and Wages Payable 27,000
Salaries and Wages Expense 27,000
d. Cash 27,000
Salaries and Wages Expense 27,000

112. Jawbreaker Company paid $940 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $490 and a credit to Accounts Receivable, $490. The correcting entry is
a. Accounts Payable 940
Cash 940
b. Accounts Receivable 490
Cash 490
c. Accounts Receivable 490
Accounts Payable 490
d. Accounts Receivable 490
Accounts Payable 940
Cash 1,430

113. A lawyer collected $710 of legal fees in advance. He erroneously debited Cash for $170 and credited Accounts Receivable for $170. The correcting entry is
a. Cash 170
Accounts Receivable 540
Unearned Service Revenue 710
b. Cash 710
Service Revenue 710
c. Cash 540
Accounts Receivable 170
Unearned Service Revenue 710
d. Cash 540
Accounts Receivable 540

114. On May 25, Yellow House Company received a $650 check from Grizzly Bean for services to be performed in the future. The bookkeeper for Yellow House Company incorrectly debited Cash for $650 and credited Accounts Receivable for $650. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should:
a. debit Cash $650 and credit Unearned Service Revenue $650.
b. debit Accounts Receivable $650 and credit Service Revenue $650.
c. debit Accounts Receivable $650 and credit Cash $650.
d. debit Accounts Receivable $650 and credit Unearned Service Revenue $650.

115. On March 8, Black Candy Company bought supplies on account from the Arcade Fire Company for $550. Black Candy Company incorrectly debited Equipment for $500 and credited Accounts Payable for $500. The entries have been posted to the ledger. the correcting entry should be:
a. Supplies 550
Accounts Payable 550
b. Supplies 550
Accounts Payable 500
Equipment 50
c. Supplies 550
Equipment 550
d. Supplies 550
Equipment 500
Accounts Payable 50

116. The following information is for Sunny Day Real Estate:
Sunny Day Real Estate
Balance Sheet
December 31, 2015

Cash $ 25,000 Accounts Payable $ 60,000
Prepaid Insurance 30,000 Salaries and Wages Payable 15,000
Accounts Receivable 50,000 Mortgage Payable 85,000
Inventory 70,000 Total Liabilities 160,000
Land Held for Investment 85,000
Land 120,000
Buildings $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000 370,000
Depreciation (20,000) 80,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders’ Equity $530,000

The total dollar amount of assets to be classified as current assets is
a. $105,000.
b. $175,000.
c. $190,000.
d. $260,000.

117. The following information is for Sunny Day Real Estate:
Sunny Day Real Estate
Balance Sheet
December 31, 2015

Cash $ 25,000 Accounts Payable $ 60,000
Prepaid Insurance 30,000 Salaries and Wages Payable 15,000
Accounts Receivable 50,000 Mortgage Payable 85,000
Inventory 70,000 Total Liabilities 160,000
Land Held for Investment 85,000
Land 120,000
Buildings $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000 370,000
Depreciation (20,000) 80,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders’ Equity $530,000

The total dollar amount of assets to be classified as property, plant, and equipment is
a. $200,000.
b. $220,000.
c. $285,000.
d. $305,000.

118. The following information is for Sunny Day Real Estate:
Sunny Day Real Estate
Balance Sheet
December 31, 2015

Cash $ 25,000 Accounts Payable $ 60,000
Prepaid Insurance 30,000 Salaries and Wages Payable 15,000
Accounts Receivable 50,000 Mortgage Payable 85,000
Inventory 70,000 Total Liabilities 160,000
Land Held for Investment 85,000
Land 120,000
Buildings $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000 370,000
Depreciation (20,000) 80,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders’ Equity $530,000

The total dollar amount of assets to be classified as investments is
a. $0.
b. $70,000.
c. $85,000.
d. $155,000.

119. The following information is for Sunny Day Real Estate:
Sunny Day Real Estate
Balance Sheet
December 31, 2015

Cash $ 25,000 Accounts Payable $ 60,000
Prepaid Insurance 30,000 Salaries and Wages Payable 15,000
Accounts Receivable 50,000 Mortgage Payable 85,000
Inventory 70,000 Total Liabilities 160,000
Land Held for Investment 85,000
Land 120,000
Buildings $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000 370,000
Depreciation (20,000) 80,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders’ Equity $530,000

The total dollar amount of liabilities to be classified as current liabilities is
a. $15,000.
b. $60,000.
c. $75,000.
d. $160,000.

120. The following information is for Bright Eyes Auto Supplies:
Bright Eyes Auto Supplies
Balance Sheet
December 31, 2015

Cash $ 40,000 Accounts Payable $ 130,000
Prepaid Insurance 80,000 Salaries and Wages Payable 50,000
Accounts Receivable 100,000 Mortgage Payable 150,000
Inventory 140,000 Total Liabilities 330,000
Land Held for Investment 180,000
Land 250,000
Buildings $200,000 Common Stock $400,000
Less Accumulated Retained Earnings 340,000 740,000
Depreciation (60,000) 140,000
Trademark 140,000 Total Liabilities and
Total Assets $1,070,000 Stockholders’ Equity $1,070,000

The total dollar amount of assets to be classified as current assets is
a. $140,000.
b. $220,000.
c. $360,000.
d. $500,000.

121. The following information is for Bright Eyes Auto Supplies:
Bright Eyes Auto Supplies
Balance Sheet
December 31, 2015

Cash $ 40,000 Accounts Payable $ 130,000
Prepaid Insurance 80,000 Salaries and Wages Payable 50,000
Accounts Receivable 100,000 Mortgage Payable 150,000
Inventory 140,000 Total Liabilities 330,000
Land Held for Investment 180,000
Land 250,000
Buildings $200,000 Common Stock $400,000
Less Accumulated Retained Earnings 340,000 740,000
Depreciation (60,000) 140,000
Trademark 140,000 Total Liabilities and
Total Assets $1,070,000 Stockholders’ Equity $1,070,000

The total dollar amount of assets to be classified as property, plant, and equipment is
a. $390,000.
b. $450,000.
c. $570,000.
d. $630,000.

122. The following information is for Bright Eyes Auto Supplies:
Bright Eyes Auto Supplies
Balance Sheet
December 31, 2015

Cash $ 40,000 Accounts Payable $ 130,000
Prepaid Insurance 80,000 Salaries and Wages Payable 50,000
Accounts Receivable 100,000 Mortgage Payable 150,000
Inventory 140,000 Total Liabilities 330,000
Land Held for Investment 180,000
Land 250,000
Buildings $200,000 Common Stock $400,000
Less Accumulated Retained Earnings 340,000 740,000
Depreciation (60,000) 140,000
Trademark 140,000 Total Liabilities and
Total Assets $1,070,000 Stockholders’ Equity $1,070,000

The total dollar amount of assets to be classified as investments is
a. $0.
b. $140,000.
c. $180,000.
d. $250,000.

123. The following information is for Bright Eyes Auto Supplies:
Bright Eyes Auto Supplies
Balance Sheet
December 31, 2015

Cash $ 40,000 Accounts Payable $ 130,000
Prepaid Insurance 80,000 Salaries and Wages Payable 50,000
Accounts Receivable 100,000 Mortgage Payable 150,000
Inventory 140,000 Total Liabilities 330,000
Land Held for Investment 180,000
Land 250,000
Buildings $200,000 Common Stock $400,000
Less Accumulated Retained Earnings 340,000 740,000
Depreciation (60,000) 140,000
Trademark 140,000 Total Liabilities and
Total Assets $1,070,000 Stockholders’ Equity $1,070,000

The total dollar amount of liabilities to be classified as current liabilities is
a. $50,000.
b. $130,000.
c. $180,000.
d. $330,000.

124. All of the following are property, plant, and equipment except
a. supplies.
b. machinery.
c. land.
d. buildings.

125. The first item listed under current liabilities is usually
a. accounts payable.
b. notes payable.
c. salaries and wages payable.
d. taxes payable.

126. Equipment is classified in the balance sheet as
a. a current asset.
b. property, plant, and equipment.
c. an intangible asset.
d. a long-term investment.

127. A current asset is
a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. an asset that a company expects to convert to cash or use up within one year.

128. An intangible asset
a. does not have physical substance, yet often is very valuable.
b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.

129. Liabilities are generally classified on a balance sheet as
a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.

130. Which of the following would not be classified a long-term liability?
a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable
d. Lease liabilities

131. Which of the following liabilities are not related to the operating cycle?
a. Salaries and wages payable
b. Accounts payable
c. Utilities payable
d. Bonds payable

132. Intangible assets include each of the following except
a. copyrights.
b. goodwill.
c. land improvements.
d. patents.

133. It is not true that current assets are assets that a company expects to
a. realize in cash within one year.
b. sell within one year.
c. use up within one year.
d. acquire within one year.

134. The operating cycle of a company is the average time that is required to go from cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

135. On a classified balance sheet, current assets are customarily listed
a. in alphabetical order.
b. with the largest dollar amounts first.
c. in the order of liquidity.
d. in the order of acquisition.

136. Intangible assets are
a. listed under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance.
c. long-lived assets that are often very valuable.
d. listed as a long-term investment on the balance sheet.

137. The relationship between current assets and current liabilities is important in evaluating a company’s
a. profitability.
b. liquidity.
c. market value.
d. accounting cycle.

138. The most important information needed to determine if companies can pay their current obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities.
d. relationship between short-term and long-term liabilities.

139. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Multiple Choice 139. (Cont.)
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

What is the company’s net income for the year ending December 31, 2015?
a. $12,000
b. $28,000
c. $42,000
d. $133,000

140. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

What is the amount that would be reported for stockholders’ equity at December 31, 2015?
a. $158,000
b. $144,000
c. $130,000
d. $102,000

141. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

What are total current assets at December 31, 2015?
a. $26,000
b. $32,000
c. $36,000
d. $42,000

142. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Equipment 210,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000

Multiple Choice 142. (Cont.)

What is the book value of the equipment at December 31, 2015?
a. $170,000
b. $182,000
c. $210,000
d. $238,000

143. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

What are total current liabilities at December 31, 2015?
a. $18,000
b. $70,000
c. $88,000
d. $120,000

144. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Multiple Choice 144. (Cont.)

Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

What are total long-term liabilities at December 31, 2015?
a. $0
b. $70,000
c. $88,000
d. $90,000

145. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Equipment 210,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000

What is total liabilities and stockholders’ equity at December 31, 2015?
a. $176,000
b. $218,000
c. $190,000
d. $232,000

146. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Equipment 210,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000

The sub-classifications for assets on the company’s classified balance sheet would include all of the following except
a. Current Assets.
b. Property, Plant, and Equipment.
c. Intangible Assets.
d. Long-term Assets.

147. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Common stock 42,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/16 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Retained earnings (1/1/15) 60,000
Salaries and wages expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

Multiple Choice 147. (Cont.)

The current assets should be listed on Postal Service’s balance sheet in the following order:
a. cash, accounts receivable, prepaid insurance, equipment.
b. cash, prepaid insurance, supplies, accounts receivable.
c. cash, accounts receivable, prepaid insurance, supplies.
d. equipment, supplies, prepaid insurance, accounts receivable, cash.

148. Which statement about long-term investments is not true?
a. They will be held for more than one year.
b. They are not currently used in the operation of the business.
c. They include investments in stock of other companies and land held for future use.
d. They can never include cash accounts.

149. What is the order in which assets are generally listed on a classified balance sheet?
a. Current and long-term
b. Current; property, plant, and equipment; long-term investments; intangible assets
c. Current; property, plant, and equipment; intangible assets; long-term investments
d. Current; long-term investments; property, plant, and equipment; intangible assets

150. These are selected account balances on December 31, 2015.
Land (location of the office building) $100,000
Land (held for future use) 150,000
Office Building 700,000
Inventory 200,000
Equipment 450,000
Office Furniture 150,000
Accumulated Depreciation 425,000
What is the total amount of property, plant, and equipment that will appear on the balance sheet?
a. $975,000
b. $1,125,000
c. $1,175,000
d. $1,400,000

151. The following selected account balances appear on the December 31, 2015 balance sheet of Superchunk Co.
Land (location of the office building) $150,000
Land (held for future use) 225,000
Office Building 800,000
Inventory 300,000
Equipment 675,000
Office Furniture 225,000
Accumulated Depreciation 640,000
What is the total amount of property, plant, and equipment that will be reported on the balance sheet?
a. $1,210,000
b. $1,435,000
c. $1,510,000
d. $1,850,000

a152. A reversing entry
a. reverses entries that were made in error.
b. is the exact opposite of an adjusting entry made in a previous period.
c. is made when a business disposes of an asset it previously purchased.
d. is made when a company sustains a loss in one period and reverses the effect with a profit in the next period.

a 153. If a company utilizes reversing entries, they will
a. be made at the beginning of the next accounting period.
b. not actually be posted to the general ledger accounts.
c. be made before the post-closing trial balance.
d. be part of the adjusting entry process.

154. The steps in the preparation of a worksheet do not include
a. analyzing documentary evidence.
b. preparing a trial balance on the worksheet.
c. entering the adjustments in the adjustment columns.
d. entering adjusted balances in the adjusted trial balance columns.

155. Balance sheet accounts are considered to be
a. temporary stockholders’ equity accounts.
b. permanent accounts.
c. equity accounts.
d. nominal accounts.

156. Income Summary has a credit balance of $17,000 in S. Sufjan Co. after closing revenues and expenses. The entry to close Income Summary is
a. credit Income Summary $17,000, debit Retained Earnings $17,000.
b. credit Income Summary $17,000, debit Dividends $17,000.
c. debit Income Summary $17,000, credit Dividends $17,000.
d. debit Income Summary $17,000, credit Retained Earnings $17,000.

157. The post-closing trial balance contains only
a. income statement accounts.
b. balance sheet accounts.
c. balance sheet and income statement accounts.
d. income statement, balance sheet, and retained earnings statement accounts.

158. Which of the following is an optional step in the accounting cycle?
a. Adjusting entries
b. Closing entries
c. Correcting entries
d. Reversing entries

159. Which one of the following statements concerning the accounting cycle is incorrect?
a. The accounting cycle includes journalizing transactions and posting to ledger accounts.
b. The accounting cycle includes only one optional step.
c. The steps in the accounting cycle are performed in sequence.
d. The steps in the accounting cycle are repeated in each accounting period.

160. Correcting entries are made
a. at the beginning of an accounting period.
b. at the end of an accounting period.
c. whenever an error is discovered.
d. after closing entries.

161. On September 23, Sebadoh Company received a $350 check from Surfer Rosa Inc. for services to be performed in the future. The bookkeeper for Sebadoh Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should
a. debit Cash $350 and credit Unearned Service Revenue $350.
b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350.
c. debit Accounts Receivable $350 and credit Cash $350.
d. debit Accounts Receivable $350 and credit Service Revenue $350.

162. All of the following are stockholders’ equity accounts except
a. Dividends.
b. Common Stock.
c. Investment in Stock.
d. Retained Earnings.

163. Current liabilities
a. are obligations that the company is to pay within the forthcoming year.
b. are listed in the balance sheet in order of their expected maturity.
c. are listed in the balance sheet, starting with accounts payable.
d. should not include long-term debt that is expected to be paid within the next year.

a164. The use of reversing entries
a. is a required step in the accounting cycle.
b. changes the amounts reported in the financial statements.
c. simplifies the recording of subsequent transactions.
d. is required for all adjusting entries.

165. The classified balance sheet is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with certain variations in format as compared to GAAP.

166. IFRS requires the use of
a. the term balance sheet.
b. the term statement of financial position.
c. neither balance sheet nor statement of financial position, but recommends use of the term balance sheet.
d. neither balance sheet nor statement of financial position, but recommends use of the term statement of financial position.

167. IFRS
a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP.
b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP.
c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP.
d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.

168. Most companies that follow IFRS present balance sheet (statement of financial position) information in this order:
a. current assets; investments; property, plant and equipment; intangible assets; current liabilities; long term liabilities; equity.
b. intangible assets; property, plant and equipment; investments; current assets; current liabilities; equity; long term liabilities.
c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity.
d. noncurrent assets; current assets; equity; noncurrent liabilities; current liabilities.

169. Under IFRS and under GAAP, current assets are listed in
IFRS GAAP
a. order of liquidity order of liquidity
b. reverse order of liquidity order of liquidity.
c. order of liquidity reverse order of liquidity
d. reverse order of liquidity reverse order of liquidity

170. The subtotal net assets is used in
a. both GAAP and IFRS.
b. GAAP but not IFRS.
c. IFRS but not GAAP.
d. neither IFRS nor GAAP.

171. Both IFRS and GAAP require disclosure about
a. accounting policies followed.
b. judgements that management has made in the process of applying the entity’s accounting policies.
c. the key assumptions and estimation uncertainty.
d. All of these answer choices are correct.

172. Under IFRS
a. comparative prior-period information must be presented, but financial statements need not be provided annually.
b. comparative prior-period informaton must be presented, and financial statements must be provided annually.
c. comparative prior-period information is not required, and financial statements need not be provided annually.
d. comparative prior-period information is not required, but financial statements must be provided annually.

173. The use of fair value to report assets
a. is not allowed under GAAP or IFRS.
b. is required by GAAP and IFRS.
c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly.
d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.

174. Under IFRS
a. companies can apply fair value to property, plant, and equipment and natural resources.
b. companies can apply fair value to property, plant, and equipment but not to natural resources.
c. companies can apply fair value to neither property, plant, and equipment nor natural resources.
d. companies can apply fair value to natural resources but not to property, plant, and equipment.

175. The IASB and FASB are working on a converged statement of financial position using the headings of
a. assets, liabilities, and equity.
b. revenues and expenses.
c. assets, liabilities, revenues, expenses and equity.
d. operating, investing, and financing.

BRIEF EXERCISES

BE 176
Use the following income statement for the year 2015 for Belle Company to prepare entries to close the revenue and expense accounts for the company.
Service revenue $85,000
Expenses:
Salaries and Wages Expense $40,000
Rent Expense 12,500
Advertising Expense 8,700
Total expenses 61,200
Net income (loss) $23,800

BE 177
Sebastien Company earned net income of $44,000 during 2014. The company paid dividends totalling $20,000 during the period. Prepare the entries to close Income Summary and the Dividends account.

BE 178
At April 1, 2015, Spiderland Company reported a balance of $20,000 in the Retained Earnings account. Spiderland Company earned revenues of $50,000 and incurred expenses of $32,000 during April 2015. The company paid dividends of $10,000 during the month.

(a) Prepare the entries to close Income Summary and the Dividends acccount at April 30, 2015.
(b) What is the balance in Retained Earnings on the April 30, 2015 post-closing trial balance?

BE 179
Identify which of the following are temporary accounts of Sabrina Company.
(1) Retained Earnings
(2) Dividends
(3) Equipment
(4) Accumulated Depreciation
(5) Depreciation Expense

BE 180
Identify which of the following accounts would have balances on a post-closing trial balance.
(1) Service Revenue
(2) Income Summary
(3) Notes Payable
(4) Interest Expense
(5) Cash

BE 181
Prepare the necessary correcting entry for each of the following.
a. A payment on account of $840 was debited to Accounts Payable $480 and credited to Cash $480.
b. The collection of Accounts Receivable of $680 was recorded as a debit to Cash $680 and a credit to Service Revenue $680.

BE 182
Prepare the necessary correcting entry for each of the following.
a. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit to Cash.
b. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a credit to Accounts Payable.

BE 183
The following accounts were included on Aeroplane Consultants adjusted trial balance at December 31, 2015:
Accounts payable $ 9,200
Accounts receivable 12,000
Cash 5,500
Common stock 25,000
Dividends 10,000
Equipment 5,000
Interest expense 3,000
Note payable, due 8/31/17 60,000
Retained earnings 15,000
Supplies 1,000
Service revenue 39,000

(a) What are total current assets?
(b) What are total current liabilities?

BE 184
The following items are taken from the adjusted trial balance of Westley Company for the month ending July 31, 2015:

Accounts payable $ 2,000
Accounts receivable 3,300
Accumulated depreciation – equipment 8,000
Cash 2,600
Common stock 30,000
Depreciation expense 2,000
Equipment 54,000
Retained earnings 7/1/15 22,000
Service revenue 33,000
Supplies 1,200
Prepare the current assets section of Westley’s classified balance sheet.

BE 185
The following information is available for Elwes Company for the year ended December 31, 2015:

Accounts payable $ 3,800
Accumulated depreciation-equipment 4,000
Common stock 5,000
Retain earnings 4,300
Intangible assets 2,300
Notes payable (due in 5 years) 5,000
Accounts receivable 1,500
Cash 2,800
Short-term investments 1,000
Equipment 8,800
Long-term investments 5,700

Instructions
Use the above information to prepare a classified balance sheet for the year ended December 31, 2015.

BE 186
The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs.
A. Current assets E. Current liabilities
B. Long-term investments F. Long-term liabilities
C. Property, plant, and equipment G. Stockholders’ equity
D. Intangible assets H. Not on the balance sheet

_____ 1. Accumulated Depreciation _____ 6. Inventory
_____ 2. Retained Earnings _____ 7. Patents
_____ 3. Interest Expense _____ 8. Prepaid Rent
_____ 4. Salaries and Wages Payable _____ 9. Mortgage Payable
_____ 5. Dividends _____ 10. Land Held for Investment

aBE 187
Inigo Company prepared the following adjusting entries at year end on December 31, 2015:
(a) Interest Expense 250
Interest Payable 250

(b) Interest Receivable 450
Interest Revenue 450

(c) Salaries and Wages Expense 3,500
Salaries and Wages Payable 3,500

In an effort to minimize errors in recording transactions, Inigo Company utilizes reversing entries. Prepare reversing entries on January 1, 2016.

EXERCISES
Ex. 188
The worksheet for Montoya Company has been completed through the adjusted trial balance. You are ready to extend each amount to the appropriate financial statement column. Indicate for each account, the financial statement column to which the account should be extended by placing a check mark () in the appropriate column.
———————————————————————————————————————————
Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr.
———————————————————————————————————————————
(1) Cash
———————————————————————————————————————————
(2) Retained Earnings
———————————————————————————————————————————
(3) Mortgage Payable
———————————————————————————————————————————
(4) Interest Receivable
———————————————————————————————————————————
(5) Supplies
———————————————————————————————————————————
(6) Accounts Payable
———————————————————————————————————————————
(7) Short-term Investments
———————————————————————————————————————————
(8) Maintenance and Repairs Expense
———————————————————————————————————————————
(9) Unearned Service Revenue
———————————————————————————————————————————
(10) Equipment
———————————————————————————————————————————
(11) Depreciation Expense
———————————————————————————————————————————
(12) Interest Revenue
———————————————————————————————————————————
(13) Salaries and Wages Expense
———————————————————————————————————————————
(14) Dividends
———————————————————————————————————————————
(15) Accum. Deprec.—Equipment
———————————————————————————————————————————
(16) Utilities Expense
———————————————————————————————————————————
(17) Salaries and Wages Payable
———————————————————————————————————————————
(18) Accounts Receivable
———————————————————————————————————————————
(19) Notes Payable
———————————————————————————————————————————
(20) Service Revenue
———————————————————————————————————————————

Ex. 189
Indicate the worksheet column (income statement Dr., balance sheet Cr., etc.) to which each of the following accounts would be extended. Account Worksheet Column
a. Accounts Receivable ________________ b. Accumulated Depreciation—Equip. ________________ c. Service Revenue ________________ d. Interest Expense ________________ e. Dividends ________________ f. Unearned Service Revenue ________________
Ex. 190
The worksheet for Gibler Rental Company appears below. Using the adjustment data below, complete the worksheet. Add any accounts that are necessary.

Adjustment data:
(a) Prepaid rent expired during August, $3.
(b) Depreciation expense on equipment for the month of August, $8.
(c) Supplies on hand on August 31 amounted to $6.
(d) Salaries and wages expense incurred at August 31 but not yet paid amounted to $10.

Ex. 190 (Cont.)
GIBLER RENTAL COMPANY
Worksheet
For the Month Ended August 31, 2015

Trial Balance
Adjustments Adjusted
Trial Balance Income Statement
Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 20
Accounts Receivable 12
Prepaid Rent 8
Supplies 10
Equipment 50
Accum. Depreciation— Equipment
10
Accounts Payable 20
Common Stock 15
Retained Earnings 14
Dividends 2
Rent Revenue 73
Depreciation Expense 6
Rent Expense 4
Salaries and Wages Expense
20

Totals 132 132
Supplies Expense
Salaries Payable
Totals
Net Income
Totals

Ex. 191
The account balances appearing on the trial balance (below) were taken from the general ledger of Irick’s Copy Shop at September 30.

Additional information for the month of September which has not yet been recorded in the accounts is as follows:
(a) A physical count of supplies indicates $300 on hand at September 30.
(b) The amount of insurance that expired in the month of September was $200.
(c) Depreciation on equipment for September was $400.
(d) Rent owed on the copy shop for the month of September was $600 but will not be paid until October.

Instructions
Using the above information, complete the worksheet on the following page for Irick’s Copy Shop for the month of September.

IRICK’S COPY SHOP
Worksheet
For the Month Ended September 30, 2015

Trial Balance
Adjustments Adjusted
Trial Balance Income Statement
Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 3,000
Supplies 1,100
Prepaid Insurance 2,200
Equipment 24,000
Accum. Depreciation— Equipment
4,500
Accounts Payable 2,400
Notes Payable 4,000
Common Stock 10,000
Retained Earnings 5,300
Dividends 2,400
Service Revenue 6,900
Utilities Expense 400
Totals 33,100 33,100
Supplies Expense
Insurance Expense
Depreciation Expense
Rent Expense
Rent Payable
Totals
Net Income
Totals

Ex. 192
The adjustments columns of the worksheet for Mandy Company are shown below.

Adjustments
Account Titles Debit Credit
Accounts Receivable 800
Prepaid Insurance 650
Accumulated Depreciation 770 Salaries and Wages Payable 1,200 Service Revenue 800 Salaries and Wages Expense 1,200 Insurance Expense 650 Depreciation Expense 770
3,420 3,420

Ex. 192 (Cont.)

Instructions
(a) Prepare the adjusting entries.
(b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended.

Ex. 193
Selected worksheet data for Patinkin Company are presented below.

Adjusted
Account Titles Trial Balance Trial Balance
Dr. Cr. Dr. Cr.
Accounts Receivable ? 31,000
Prepaid Insurance 24,000 18,000
Supplies 7,000 ?
Accumulated Depreciation 12,000 ?
Salaries and Wages Payable ? 7,600
Service Revenue 85,000 100,000
Insurance Expense ?
Depreciation Expense 9,000
Supplies Expense 5,200
Salaries and Wages Expense ? 49,000

Ex. 193 (Cont.)

Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.

Ex. 194
These financial statement items are for Rugen Company at year-end, July 31, 2015.

Salaries and wages payable $ 2,980 Notes payable (long-term) $ 3,000
Salaries and wages expense 45,700 Cash 5,200
Utilities expense 21,100 Accounts receivable 9,780
Equipment 38,000 Accumulated depreciation 6,000
Accounts payable 4,100 Dividends 4,000
Service revenue 57,200 Depreciation expense 4,000
Rent revenue 6,500 Retained earnings 28,000
Common stock 20,000 (Aug. 1, 2014)

Instructions
(a) Prepare an income statement and a retained earnings statement for the year. Stockholders not make any new investments during the year.
(b) Prepare a classified balance sheet at July 31.

Ex. 195
Prepare the necessary closing entries based on the following selected accounts.
Accumulated Depreciation $10,000 Depreciation Expense 4,000 Retained Earnings 20,000 Dividends 12,000 Salaries and Wages Expense 18,000 Service Revenue 31,000

Ex. 196
All revenue and expense accounts have been closed at the end of the calendar year for Patton Company. The Income Summary account has total debits of $530,000 and total credits of $600,000. As of the same date, Retained Earnings has a balance of $115,000, and the Dividends account has a balance of $48,000.

Instructions
(a) Journalize the entries required to complete the closing of the accounts.
(b) Prepare a retained earnings statement for the year ended December 31, 2015.

Ex. 197
At March 31, account balances after adjustments for Vizzini Cinema are as follows:
Account Balances
Accounts (After Adjustment)
Cash $ 11,000
Supplies 4,000
Equipment 50,000
Accumulated Depreciation—Equipment 12,000
Accounts Payable 5,000
Common Stock 6,000
Retained Earnings 14,000
Dividends 12,000
Ticket Revenue 65,000
Service Revenue 53,000
Advertising Expense 18,000
Supplies Expense 19,000
Depreciation Expense 4,000
Rent Expense 28,000
Salaries and Wages Expense 24,000
Utilities Expense 5,000

Instructions
Prepare the closing journal entries for Vizzini Cinema.

Ex. 198
Presented below is an adjusted trial balance for Shawn Company, at December 31, 2015.

Cash $ 7,700 Accounts payable $10,000
Accounts receivable 20,000 Notes payable 9,000
Prepaid insurance 15,000 Accumulated depreciation—
Equipment 35,000 Equipment 14,000
Depreciation expense 7,000 Service revenue 29,000
Dividends 1,500 Common stock 10,000
Advertising expense 1,400 Retained earnings 14,000
Rent expense 800 Unearned service revenue 16,000
Salaries and wages expense 12,000
Insurance expense 1,600
$102,000 $102,000

Instructions
(a) Prepare closing entries for December 31, 2015.
(b) Determine the balance in the Retained Earnings account after the entries have been posted.

Ex. 199
The adjusted account balances of the Fitness Center at July 31 are as follows:

Accounts Account Balances Accounts Account Balances
Cash $ 16,000 Service Revenue $105,000
Accounts Receivable 15,000 Interest Revenue 8,000
Supplies 4,000 Depreciation Expense 27,000
Prepaid Insurance 8,000 Insurance Expense 6,000
Buildings 300,000 Salaries and Wages Expense 35,000
Accumulated Depreciation— Supplies Expense 9,000
Buildings 120,000 Utilities Expense 12,000
Accounts Payable 19,000
Common Stock 90,000
Retained Earnings 105,000
Dividends 15,000

Instructions
Prepare the end of the period closing entries for the Fitness Center.

Ex. 200
The income statement of Fezzik’s Shoe Repair is as follows:

FEZZIK’S SHOE REPAIR
Income Statement
For the Month Ended April 30, 2015

Revenue
Service Revenue $9,500
Expenses
Salaries and Wages Expense $4,200
Depreciation Expense 350
Utilities Expense 400
Rent Expense 600
Supplies Expense 1,050
Total Expenses 6,600
Net Income $2,900

On April 1, the Retained Earnings account had a balance of $12,900. During April, the company paid $3,000 in dividends.

Instructions
(a) Prepare closing entries at April 30.
(b) Prepare a retained earnings statement for the month of April.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Ex. 201
Identify which of the following accounts would appear in a post-closing trial balance.
Accumulated Depreciation—Equipment Dividends
Depreciation Expense Service Revenue
Interest Payable Equipment

Ex. 202
The trial balances of Orton Company follow with the accounts arranged in alphabetic order. Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Orton Company.
Trial Balances
Unadjusted Adjusted Post-Closing
Accounts Payable $10,000 $10,000 $10,000
Accounts Receivable 2,200 3,200 3,200
Accumulated Depreciation—Equipment 13,000 17,000 17,000
Advertising Expense 0 16,300 0
Cash 60,000 60,000 60,000
Common Stock 30,000 30,000 30,000
Depreciation Expense 0 4,000 0
Dividends 11,000 11,000 0
Equipment 75,000 75,000 75,000
Prepaid Advertising 17,800 1,500 1,500
Prepaid Rent 15,000 11,000 11,000
Rent Expense 0 4,000 0
Retained Earnings 52,200 52,200 72,400
Service Revenue 96,000 105,000 0
Supplies 3,200 700 700
Supplies Expense 2,000 4,500 0
Unearned Service Revenue 23,000 15,000 15,000
Salaries and Wages Expense 38,000 45,000 0
Salaries and Wages Payable 0 7,000 7,000

Ex. 203
Indicate the proper sequence of the steps in the accounting cycle by placing numbers 1-8 in the blank spaces. ____ a. Analyze business transactions. ____ b. Journalize and post adjusting entries. ____ c. Journalize and post closing entries. ____ d. Journalize the transactions. ____ e. Prepare a post-closing trial balance. ____ f. Prepare a trial balance. ____ g. Prepare financial statements. ____ h. Post to ledger accounts.
Ex. 204
Prepare the necessary correcting entry for each of the following.
a. A collection on account of $350 from a customer was credited to Accounts Receivable $530 and debited to Cash $530.
b. The purchase of supplies on account for $310 was recorded as a debit to Equipment $310 and a credit to Accounts Payable $310.

Ex. 205
An examination of the accounts of Savage Company for the month of June revealed the following errors after the transactions were journalized and posted.
1. A check for $800 from R. Wright, a customer on account, was debited to Cash $800 and credited to Service Revenue, $800.
2. A payment for Advertising Expense costing $630 was debited to Utilities Expense, $360 and credited to Cash $360.
3. A bill for $850 for Supplies purchased on account was debited to Equipment, $580 and credited to Accounts Payable $580.

Instructions
Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. Explain how the transaction as originally recorded affected net income for the month of June.

Ex. 206
As Mel Smith was doing his year-end accounting, he noticed that the bookkeeper had made errors in recording several transactions. The erroneous transactions are as follows:
(a) A check for $700 was issued for goods previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $700.
(b) A check for $180 was received as payment on account. The bookkeeper debited Accounts Payable for $810 and credited Accounts Receivable for $810.
(c) When making the entry to record the year’s depreciation expense, the bookkeeper debited Accumulated Depreciation—Equipment for $1,000 and credited Cash for $1,000.
(d) When accruing interest on a note payable, the bookkeeper debited Interest Receivable for $200 and credited Interest Payable for $200.

Instructions
Prepare the appropriate correcting entries. (Do not reverse the original entries.)

Ex. 207
Peter Cook, CPA, was asked by Carol Kane to review the accounting records and prepare the financial statements for her upholstering shop. Peter reviewed the records and found three errors.
1. Cash paid on accounts payable for $930 was recorded as a debit to Accounts Payable $390 and a credit to Cash $390.
2. The purchase of supplies on account for $600 was debited to Equipment $600 and credited to Accounts Payable $600.
3. The company paid dividends of $1,300 and the bookkeeper debited Accounts Receivable for $130 and credited Cash $130.

Ex. 207 (Cont.)
Instructions
Prepare an analysis of each error showing the
(a) incorrect entry.
(b) correct entry.
(c) correcting entry.

Ex. 208
Wakefield Company discovered the following errors made in January 2015.
1. A payment of salaries expense of $900 was debited to Equipment and credited to Cash, both for $900.
2. A collection of $2,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200.
3. The purchase of equipment on account for $680 was debited to Equipment $860 and credited to Accounts Payable $860.
Instructions
Correct the errors by reversing the incorrect entry and preparing the correct entry.

Ex. 209
The following items were taken from the financial statements of Buttercup Company. (All dollars are in thousands.)

Mortgage payable $ 2,443 Accumulated depreciation 3,655
Prepaid insurance 880 Accounts payable 1,444
Property, plant, and equipment 11,500 Notes payable after 2016 1,200
Long-term investments 1,100 Common stock 5,000
Short-term investments 3,690 Retained earnings 8,480
Notes payable in 2016 1,000 Accounts receivable 1,696
Cash 2,600 Inventories 1,756

Ex. 209 (Cont.)
Instructions
Prepare a classified balance sheet in good form as of December 31, 2015.

Ex. 210
Compute the dollar amount of current assets based on the following account balances.

Accounts Receivable $22,000 Accumulated Depreciation—Equipment 27,000 Cash 8,400 Equipment 93,000 Prepaid Rent 7,000 Short-term Investments 15,000

Ex. 211
The financial statement columns of the worksheet for Miracle Max at December 31, 2015, are as follows:
MIRACLE MAX
Worksheet
For the Year Ended December 31, 2015
Income Statement Balance Sheet
Accounts Debit Credit Debit Credit
Cash 13,000
Accounts Receivable 7,000
Supplies 4,000
Prepaid Insurance 6,000
Equipment 207,000
Accumulated Depreciation—Equipment 29,000
Accounts Payable 19,000
Notes Payable 70,000
Salaries and Wages Payable 3,000
Common Stock 50,000
Retained Earnings 62,000
Dividends 18,000
Service Revenue 123,000
Advertising Expense 21,000
Depreciation Expense 12,000
Insurance Expense 3,000
Rent Expense 17,000
Salaries and Wages Expense 42,000
Supplies Expense 6,000
Totals 101,000 123,000 255,000 233,000
Net Income 22,000 22,000
123,000 123,000 255,000 255,000

Instructions
(a) Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2015.
(b) Prepare a classified balance sheet for Miracle Max at December 31, 2015 assuming the note payable is a long-term liability.

Ex. 212
The financial statement columns of the worksheet for Booer Company as of December 31, 2015 are as follows:
BOOER COMPANY
Worksheet
For the Year Ended December 31, 2015

Income Statement Balance Sheet
Accounts Debit Credit Debit Credit
Cash 8,000
Accounts Receivable 26,000
Supplies 4,500
Prepaid Insurance 7,000
Equipment 41,000
Accumulated Depreciation—Equipment 4,800
Patents 7,500
Accounts Payable 22,200
Notes Payable (due 2018) 20,000
Common Stock 30,000
Retained Earnings 13,300
Dividends 4,200
Service Revenue 26,400
Salaries and Wages Expense 5,200
Depreciation Expense 4,800
Insurance Expense 5,000
Interest Expense 3,500
Totals 18,500 26,400 98,200 90,300
Net Income 7,900 7,900
26,400 26,400 98,200 98,200

Instructions
Prepare a classified balance sheet for Booer Company.

aEx. 213
Reisner Company prepared the following adjusting entries at year end on December 31, 2015:
(a) Interest Expense 150
Interest Payable 150

(b) Unearned Revenue 1,500
Service Revenue 1,500

(c) Insurance Expense 1,200
Prepaid Insurance 1,200

(d) Interest Receivable 100
Interest Revenue 100

(e) Supplies Expense 250
Supplies 250

(f) Salaries and Wages Expense 3,000
Salaries and Wages Payable 3,000

Ex. 213 (Cont.)
In an effort to minimize errors in recording transactions, Reisner Company utilizes reversing entries.

Instructions
Prepare reversing entries on January 1, 2016, for the adjusting entries given where appropriate.

aEx. 214
On December 31, 2015 the adjusted trial balance of the Yellin Personnel Agency shows the following selected data:
Accounts Receivable, $8,000
Service Revenue, $60,000
Interest Expense, $10,500
Interest Payable, $3,500
Utilities Expense, $4,800
Accounts Payable, $2,700

Analysis indicates that adjusting entries were made for (a) $8,000 of employment commission revenue earned but not billed, (b) $3,500 of accrued but unpaid interest, and (c) $2,700 of utilities expense accrued but not paid.

Instructions
(a) Prepare the closing entries at December 31, 2015.
(b) Prepare the reversing entries on January 1, 2016.
(c) Enter the adjusted trial balance data in T-accounts. Post the entries in (a) and (b) and rule and balance the accounts.
(d) Prepare the entries to record (1) the collection of the accrued commission on January 8, (2) payment of the utility bill on January 10, and (3) payment of all the interest due ($4,000) on January 15.
(e) Post the entries in (d) to the temporary accounts.
(f) What is the interest expense for the month of January 2016?

aEx. 215
Transaction and adjustment data for Doty Company for the calendar year end is as follows:
1. December 24 (initial salary entry): $12,000 of salaries earned between December 1 and December 24 are paid.

2. December 31 (adjusting entry): Salaries earned between December 25 and December 31 are $3,000. These will be paid in the January 8 payroll.

3. January 8 (subsequent salary entry): Total salary payroll amounting to $8,000 was paid.

Instructions
Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversing entries are utilized by the company.

Assume no reversing entries Assume reversing entries

(a) Initial Salary Entry

Dec. 24

(b) Adjusting Entry

Dec. 31

(c) Closing Entry

Dec. 31

(d) Reversing Entry

Jan. 1

(e) Subsequent Salary Entry

Jan. 8

COMPLETION STATEMENTS
216. The first step in preparing a worksheet is to prepare a ______________ from the general ledger accounts.

217. The account balances appearing in the adjusted trial balance columns are extended to the ______________ columns and the ______________ columns.

218. The process of transferring net income (or loss) for the period to Retained Earnings is accomplished by making ______________ entries.

219. At the end of an accounting period, all revenue and expense accounts are closed to a temporary account called ______________.

220. The Dividends account is closed to the ______________ account at the end of the accounting period.

221. After all closing entries have been journalized and posted, the final step in the accounting cycle is to prepare a ______________ trial balance.

222. The preparation of a ______________ and ______________ entries are two optional steps in the accounting cycle.

223. Two permanent accounts that are part of the stockholders’ equity in a corporation are ______________ and ______________.

224. The four major classifications of assets in a classified balance sheet are: ________________, ________________, ________________ and ________________.

225. The ______________ of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.

226. Assets that do not have a physical substance yet often are very valuable are called ______________ assets.

227. Liabilities are generally classified as either ______________ or ______________ on a classified balance sheet.

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

A. Worksheet F. Common Stock
B. Permanent accounts G. Current assets
C. Closing entries H. Operating cycle
D. Income Summary I. Long-term liabilities
E. Reversing entry J. Correcting entries

1. Obligations that a company expects to pay after one year.

2. A part of owners’ equity in a corporation.

3. An optional tool which facilitates the preparation of financial statements.

4. A temporary account used in the closing process.

5. Balance sheet accounts whose balances are carried forward to the next period.

6. The average time that it takes to go from cash to cash in producing revenues.

7. Entries to correct errors made in recording transactions.

8. The exact opposite of an adjusting entry made in a previous period.

9. Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders’ equity account.

10. Assets that a company expects to pay or convert to cash or use up within one year.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 229
A worksheet is an optional working tool used by accountants to facilitate the preparation of financial statements. Consider the steps followed in preparing a worksheet. How does the use of a worksheet assist the accountant. Could financial statements be prepared without a worksheet? Evaluate how the process would differ. Consider factors such as timeliness, accuracy, and efficiency in your evaluation.

S-A E 230
Journalizing and posting closing entries is a required step in the accounting cycle. Discuss why it is necessary to close the books at the end of an accounting period. If closing entries were not made, how would the preparation of financial statements be affected?

S-A E 231
Give the definition of current assets and current liabilities and provide two examples of each.

S-A E 232
(a) What is the term used to describe the owner’s equity section of a corporation? (b) Identify the two owners’ equity accounts in a corporation and indicate the purpose of each.

S-A E 233
Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?

S-A E 234 (Ethics)
Under Protection provides underground storage facilities for companies desiring off-site storage of sensitive documents, computer records, and other items. They have developed a sophisticated surveillance and security system which they initially used in their own facilities, and have recently started to market elsewhere as well.

The underground storage facilities are made from natural caves in some instances (reinforced and modified as appropriate) and from excavations of natural rock formations in others. The land was purchased over ten years ago for a total of $2.5 million. The modifications have cost approximately $15 million more. The company has never depreciated its storage facilities because the market value of the property has continued to rise. Presently, the market price is between $30 and $40 million.

Betsy Brantley, a new accounting manager, questioned this depreciation policy. Will Gray, the controller, has told her that she needn’t worry about it. For one thing, he says, this is really a special form of Land account, which should not be depreciated at all. For another, this is a privately held company, and so they don’t need to worry about misleading investors. All the owners know about and approve the depreciation policy.

Required:
What are the ethical issues in this situation?

S-A E 235 (Communication)
You have recently started to work for Storry Malcom, manufacturers of cemetery markers and monuments. During your first month at work, you inadvertently recorded as revenue, about $4,000 of prepayments from Budger Company. The financial statements had been released within the company when you discovered your error. The month-end closing had not been completed, however, and you were able to correct the accounts without incident.

Required:
Prepare a short note to accompany the re-released financial statements explaining the mistake.

CHALLENGE EXERCISES
CE 1
The adjusted trial balance for Molina Company is presented below.

MOLINA COMPANY
Adjusted Trial Balance
July 31, 2015
No. Account Titles Debits Credits
101 Cash $18,000
112 Accounts Receivable 9,000
157 Equipment 26,000
167 Accumulated Depreciatio–Equip. $ 8,000
201 Accounts Payable 5,500
208 Unearned Rent Revenue 2,000
311 Common Stock 22,000
320 Retained Earnings 27,500
332 Dividends 17,000
400 Service Revenue 69,000
429 Rent Revenue 11,000
711 Depreciation Expense 5,000
726 Salaries and Wages Expense 60,000
732 Utilities Expense 10,000
$145,000 $145,000

Molina made an error during year when they debited Utilities Expense for $2,000 instead of Equipment for a cash purchase of equipment. In addition, Molina failed to accrue $4,000 of Service Revenue.

Instructions
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified balance sheet at July 31.

CE 2
Remington Company discovered the following errors made in January 2015

1. A payment of salaries and wages of $1,000 was debited to Equipment and credited to Cash, both for $1,000. Remington recorded $200 of depreciation on this “equipment”.
2. A collection of $3,000 from a client on account was debited to Cash $300 and credited to Service Revenue $300.
3. The purchase of supplies on account for $840 was debited to Supplies $480 and credited to Accounts Payable $480.
4. The purchase of short-term investments for $1,500 cash was debited to Prepaid Rent and credited to Cash. At year end, $500 of the “prepaid rent” was recorded as rent expense.

Instructions
(a) Correct the errors by reversing the incorrect entry and preparing the correct entry.
(b) Correct the errors without reversing the incorrect entry.

CE 3
The following items were taken from the financial statements Wyatt Company. (All dollars are in thousands.)

Long-term debt $ 1,950 Accumulated depreciation $ 5,600
Prepaid insurance 900 Accounts payable 2,444
Equipment 14,300 Notes payable after 2016 1,024
Long-term investments 464 Common stock 10,000
Short-term investments 3,490 Retained earnings 5,800
Notes payable in 2016 474 Accounts receivable 1,734
Cash 4,648 Inventory 1,456
Patents 600

2015 net income was 1,000 and dividends paid were $700.
Instructions
Prepare a classified balance sheet in good form as of December 31, 2015.

CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

CHAPTER LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies.
2. Explain the recording of purchases under a perpetual inventory system.
3. Explain the recording of sales revenues under a perpetual inventory system.
4. Explain the steps in the accounting cycle for a merchandising company.
5. Distinguish between a multiple-step and a single-step income statement.
a6. Prepare a worksheet for a merchandising company.
a7. Explain the recording of purchases and sales of inventory under a periodic inventory system.

TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.

2. The steps in the accounting cycle are different for a merchandising company than for a service company.

3. Sales minus operating expenses equals gross profit.

4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

5. A periodic inventory system requires a detailed inventory record of inventory items.

6. Freight terms of FOB Destination means that the seller pays the freight costs.

7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

8. Sales revenues are recognized during the period cash is collected from the buyer.

9. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

10. Merchandisers apply the revenue recognition principle by recognizing sales revenues when the performance obligation is satisfied.

11. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

13. A company’s unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

15. A merchandising company has different types of adjusting entries than a service company.

16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

17. Operating expenses are different for merchandising and service enterprises.

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

19. A multiple-step income statement provides users with more information about a company’s income performance.

20. The multiple-step form of income statement is easier to read than the single-step form.

21. Inventory is classified as a current asset in a classified balance sheet.

22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

27. Gross profit represents the merchandising profit of a company.

28. Gross profit is a measure of the overall profitability of a company.

29. Gross profit rate is computed by dividing cost of goods sold by net sales.

a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

35. Inventory is reported as a long-term asset on the balance sheet.

36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

38. Sales revenue should be recorded in accordance with the matching principle.

39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

42. The major difference between the balance sheets of a service company and a merchandising company is inventory.

MULTIPLE CHOICE QUESTIONS
43. Net income is gross profit less
a. financing expenses.
b. operating expenses.
c. other expenses and losses.
d. other expenses.

44. An enterprise which sells goods to customers is known as a
a. proprietorship.
b. corporation.
c. retailer.
d. service firm.

45. Which of the following would not be considered a merchandising company?
a. Retailer
b. Wholesaler
c. Service firm
d. All of these are considered a merchandising company.

46. A merchandising company that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service company.

47. Two categories of expenses for merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.

48. The primary source of revenue for a wholesaler is
a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.

49. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.

50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.

51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.

52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales revenue – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit

53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.

54. A perpetual inventory system would likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.

55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.

56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.

57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.

58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.

59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.

60. The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.

61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.

62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.

63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.

64. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.

65. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?
a. $8,100
b. $8,280
c. $8,820
d. $9,000

66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 20%
b. 24%
c. 18%
d. 36%

67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
a. Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.

69. Jake’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $60,000, terms 2/10, n/30.
Returned $1,200 of the shipment for credit.
Paid $300 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory increased by
a. $57,624.
b. $57,918.
c. $57,924.
d. $59,100.

70. Costner’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $38,612.
c. increased by $38,616.
d. increased by $39,400.

71. Under the perpetual system, freight costs incurred by the buyer for the transporting of goods is recorded in
a. Freight Expense.
b. Freight – In.
c. Inventory.
d Freight – Out.

72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:
a. Accounts Payable 5,000
Inventory 5,000
b. Accounts Payable 5,000
Inventory 150
Cash 5,150
c. Accounts Payable 5,000
Purchase Discounts 120
Inventory 4,850
d. Accounts Payable 5,000
Inventory 120
Cash 4,850

73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:
a. Accounts Payable 9,000
Cash 9,000
b. Accounts Payable 8,730
Cash 8,730
c. Accounts Payable 9,000
Purchase Returns and Allowances 270
MC. 73 (Cont.)
Cash 8,730
d. Accounts Payable 9,000
Inventory 270
Cash 8,730

74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
a. Cash 5,000
Accounts Receivable 5,000
b. Cash 5,000
Sales Discounts 50
Accounts Receivable 4,950
c. Cash 4,950
Sales Discounts 50
Accounts Receivable 5,000
d. Cash 5,050
Sales Discounts 50
Accounts Receivable 5,000

75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day’s cash sales will include:
a. a $3,600 credit to Cost of Goods Sold.
b. a $6,000 credit to Cash.
c. a $3,600 credit to Inventory.
d a $6,000 debit to Accounts Receivable.

76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?
a. $3,675
b. $3,750
c. $3,920
d $4,000

77. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $40.
b. Cash for $1,960.
c. Accounts Receivable for $2,000.
d. Sales Revenue for $2,000.

78. The collection of a $6,000 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $120.
b. debit to Accounts Receivable for $5,880.
c. credit to Cash for $5,880.
d. credit to Accounts Receivable for $5,880.

79. Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y’s check?
a. $630
b. $720
c. $810
d. $882

80. Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $3,920
b. $4,000
c. $4,900
d. $4,920

81. The collection of a $1,500 account after the 2 percent discount period will result in a
a. debit to Cash for $1,470.
b. debit to Accounts Receivable for $1,500.
c. debit to Cash for $1,500.
d. debit to Sales Discounts for $30.

82. The collection of a $1,000 account after the 2 percent discount period will result in a
a. debit to Cash for $980.
b. credit to Accounts Receivable for $1,000.
c. credit to Cash for $1,000.
d. debit to Sales Discounts for $20.

83. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.

84. Sales revenues are usually considered recognized when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.

85. A sales invoice is a source document that
a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.

86. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.

87. The journal entry to record a credit sale of merchandise is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales Revenue

88. Sales Returns and Allowances is increased when
a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.

89. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.

90. A credit granted to a customer for returned goods requires a debit to
a. Sales Revenue and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.

91. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.

92. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24?
a. $3,332
b. $3,440
c. $3,528
d $3,600

93. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used.
b. the cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.

94. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.

95. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.

96. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.

97. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

98. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra-revenue account.
d. increase an operating expense account.

99. Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?
a. $1,750
b. $2,000
c. $2,250
d. $2,450

100. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $6,272
b. $6,400
c. $7,840
d. $7,872

101. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?
a. Cash 3,400
Accounts Receivable 3,400
b. Cash 3,332
Sales Returns and Allowances 668
Accounts Receivable 4,000
c. Cash 3,332
Sales Returns and Allowances 600
Sales Discounts 68
Accounts Receivable 4,000
d. Cash 3,920
Sales Discounts 80
Sales Returns and Allowances 600
Accounts Receivable 3,400

102. Which of the following would not be classified as a contra account?
a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts

103. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Selling Expense

104. With respect to the income statement,
a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.

105. When a seller grants credit for returned goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.

106. The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.

107. All of the following are contra revenue accounts except
a. sales revenue.
b. sales allowances.
c. sales discounts.
d. sales returns.

108. A merchandising company using a perpetual system will make
a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.

109. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of
a. sales revenue.
b. inventory.
c. sales discounts.
d. freight-out.

110. A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary.
b. crediting Income Summary.
c. debiting Cost of Goods Sold.
d. debiting Sales Revenue.

111. The operating cycle of a merchandiser is
a. always one year in length.
b. generally longer than it is for a service company.
c. about the same as for a service company.
d. generally shorter than it is for a service company.

112. When the physical count of Rosanna Company inventory had a cost of $4,350 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:
a. Cost of Goods Sold 150
Inventory 150
b. Inventory 150
Cost of Goods Sold 150
c. Income Summary 150
Inventory 150
d. Cost of Goods Sold 4,500
Inventory 4,500

Solution: $4,500 − $4,350 = $150

113. Arquette Company’s financial information is presented below.
Sales Revenue $ ???? Cost of Goods Sold 540,000
Sales Returns and Allowances 40,000 Gross Profit ????
Net Sales 900,000
The missing amounts above are:
Sales Revenue Gross Profit
a. $940,000 $360,000
b. $860,000 $360,000
c. $940,000 $420,000
d. $860,000 $420,000

114. The sales revenue section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales revenue.
c. Net sales.
d. Cost of goods sold.

115. The operating expense section of an income statement for a wholesaler would not include
a. freight-out.
b. utilities expense.
c. cost of goods sold.
d. insurance expense.

116. Income from operations will always result if
a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.

117. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenues
d. Cost of goods sold

118. Conrad Company reported the following balances at June 30, 2015:
Sales Revenue $16,200
Sales Returns and Allowances 600
Sales Discounts 300
Cost of Goods Sold 7,500
Net sales for the month is
a. $7,800
b. $15,300.
c. $15,600.
d. $16,200.

119. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.

120. Gross profit does not appear
a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.

121. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are similar for merchandising and service enterprises.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

122. Which one of the following is shown on a multiple-step but not on a single-step income statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold

123. All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees’ strikes.

124. If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross profit percentage is
a. 25%.
b. 35%.
c. 65%.
d. 100%.

125. A company shows the following balances:
Sales Revenue $2,500,000
Sales Returns and Allowances 450,000
Sales Discounts 50,000
Cost of Goods Sold 1,400,000
What is the gross profit percentage?
a. 30%
b. 44%
c. 56%
d. 70%

126. The gross profit rate is computed by dividing gross profit by
a. cost of goods sold.
b. net income.
c. net sales.
d. sales revenue.

127. In terms of liquidity, inventory is
a. more liquid than cash.
b. more liquid than accounts receivable.
c. more liquid than prepaid expenses.
d. less liquid than store equipment.

128. On a classified balance sheet, inventory is classified as
a. an intangible asset.
b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.

129. Gross profit for a merchandiser is net sales minus
a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.

130. During 2015, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Parker’s gross profit is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.

131. During 2015, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Parker’s income from operations is
a. $18,000.
b. $27,000.
c. $45,000.
d. $90,000.

132. During 2015, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Parker’s net income is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.

133. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000

Gross profit would be
a. $30,000.
b. $90,000.

MC. 133 (Cont.)
c. $165,000.
d. $225,000.

134. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000

The gross profit rate would be
a. .133.
b. .400.
c. .600.
d. .733.

135. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales 300,000
Cost of Goods Sold 158,000

Gross profit would be
a. $104,000.
b. $116,000.
c. $130,000.
d. $142,000.

136. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales Revenue 300,000
Cost of Goods Sold 158,000

The gross profit rate would be
a. .347.
b. .397.
c. .473.
d. .542.

137. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000

The amount of net sales on the income statement would be
a. $290,000.
b. $302,000.
c. $308,000.
d. $320,000.

138. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000

Gross profit would be
a. $26,000.
b. $116,000.
c. $128,000.
d. $134,000.

139. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000

The gross profit rate would be
a. .363.
b. .400.
c. .456.
d. .503.

140. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $390,000, the gross profit rate is
a. 35%.
b. 38%
c. 62%.
d. 65%.

141. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Dawson’s will report monthly net sales revenue and cost of goods sold of
a. $39,000 and $23,400.
b. $39,000 and $24,000.
c. $40,000 and $23,400.
d. $40,000 and $24,000.

142. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s gross profit for August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.

143. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s nonoperating income (loss) for the month of August, 2015 is
a. $0.
b. $1,000.
c. $2,000.
d. $3,000.

144. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s operating income for the month of August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.

145. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s net income for August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.

a146. In a worksheet for a merchandising company, Inventory would appear in the
a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.

a147. The Inventory account balance appearing in a perpetual inventory worksheet represents the
a. ending inventory.
b. beginning inventory.
c. cost of merchandise purchased.
d. cost of merchandise sold.

a148. The following information is available for Dennehy Company:
Sales Revenue $390,000 Freight-In $30,000
Ending Inventory 37,500 Purchase Returns and Allowances 15,000
Purchases 270,000 Beginning Inventory 45,000

Dennehy’s cost of goods sold is
a. $262,500.
b. $285,000.

MC. 148 (Cont.)
c. $292,500.
d. $345,000.

,
a149. At the beginning of September 2015, Stella Company reported Inventory of $8,000. During the month, the company made purchases of $35,600. At September 30, 2015, a physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is
a. $35,200.
b. $35,600.
c. $36,000.
d. $43,600.

,
a150. At the beginning of the year, Hunt Company had an inventory of $750,000. During the year, the company purchased goods costing $2,400,000. If Hunt Company reported ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold and gross profit rate must be
a. $1,500,000 and 66.7%.
b. $2,250,000 and 40%.
c. $1,500,000 and 40%.
d. $2,250,000 and 60%.

a151. During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost of goods sold for the year was $500,000, purchases must have been
a. $475,000.
b. $500,000.
c. $525,000.
d. Unable to determine.

a152. Cost of goods available for sale is computed by adding
a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.

a 153. The Freight-In account
a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.

a 154. Net purchases plus freight-in determines
a. cost of goods sold.
b. cost of goods available for sale.
c. cost of goods purchased.
d. total goods available for sale.

a155. Goldblum Company has the following account balances:
Purchases $96,000
Sales Returns and Allowances 12,800
Purchase Discounts 8,000
Freight-In 6,000
Delivery Expense 10,000
The cost of goods purchased for the period is
a. $80,800.
b. $88,000.
c. $94,000.
d. $104,000.

,
a156. McKendrick Shoe Store has a beginning inventory of $45,000. During the period, purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical count of inventory at the end of the period revealed that $30,000 was still on hand. The cost of goods available for sale was
a. $189,000.
b. $204,000.
c. $219,000.
d. $249,000.

a157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting
a. Accounts Payable.
b. Inventory.
c. Purchases.
d. Purchase Returns and Allowances.

a158. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?
a. Cash received on account with a discount
b. Payment of freight costs on a purchase
c. Return of merchandise sold
d. Sale of merchandise on credit

a159. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be
a. Accounts Payable
Purchase Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Inventory
Accounts Payable

a160. Under a periodic inventory system, acquisition of merchandise is debited to the
a. Inventory account.
b. Cost of Goods Sold account.
c. Purchases account.
d. Accounts Payable account.

a161. Which of the following accounts has a normal credit balance?
a. Purchases
b. Sales Returns and Allowances
c. Freight-In
d. Purchase Discounts

a162. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are
a. credit, credit, debit.
b. debit, credit, credit.
c. debit, credit, debit.
d. debit, debit, debit.

a163. Cobb Company’s accounting records show the following at the year ending on December 31, 2015:

Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800

Using the periodic system, the cost of goods purchased is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.

a164. Cobb Company’s accounting records show the following at the year ending on December 31, 2015:

Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800

Using the periodic system, the cost of goods sold is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.

165. Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is
a. $0.
b. $10,000.
c. $24,000.
d. $46,000.

166. Rae Company uses a perpetual inventory system and made a purchase of merchandise on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is
a. Accounts Payable 9,000
Cash 9,000
b. Accounts Payable 8,820
Cash 8,820
c. Accounts Payable 9,000
Purchase Returns and Allowances 180
Cash 8,820
d. Accounts Payable 9,000
Inventory 180
Cash 8,820

167. Kate Company uses a perpetual inventory system and purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:
a. There is no entry on Kate’s books for this transaction.
b. Freight Expense 500
Cash 500
c. Freight-Out 500
Cash 500
d. Inventory 500
Cash 500

168. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Inventory.

169. On October 4, 2015, JT Corporation had credit sales transactions of $4,000 from merchandise having cost $2,400. The entries to record the day’s credit transactions include a
a. debit of $4,000 to Inventory.
b. credit of $4,000 to Sales Revenue.
c. debit of $2,400 to Inventory.
d. credit of $2,400 to Cost of Goods Sold.

170. Which of the following accounts is not closed to Income Summary?
a. Cost of Goods Sold
b. Inventory
c. Sales Revenue
d. Sales Discounts

171. In the Augie Company, sales were $750,000, sales returns and allowances were $30,000, and cost of goods sold was $450,000. The gross profit rate was
a. 36%.
b. 37.5%.
c. 40%.
d. 41.7%.

172. Net sales is sales revenue less
a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.

173. In the balance sheet, ending inventory is reported
a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.

a174. Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.

175. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.

176. The basic accounting entries for merchandising are
a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.

177. Under GAAP, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

178. Under IFRS, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

179. Companies cannot use the
a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. both periodic and perpetual can be used under GAAP and IFRS.

180. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the providing of services.
d. All of these answer choices are correct.

181. Under GAAP, companies generally classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.

182. Under IFRS, companies must classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.

183. Under GAAP, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.

184. Under IFRS, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.

185. For the income statement, IFRS requires
a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.

186. Under IFRS, companies can apply revaluation to
a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land or buildings.
d. no assets.

187. The use of IFRS results in more transactions affecting
a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. but net income and other comprehensive income.
d. neither net income nor other comprehensive income.

188. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.

189. The number of years of income statement information to be presented is
a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.

BRIEF EXERCISES
BE 190
Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.
Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $86,000 $59,000 $48,000 (d)

BE 191
Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):
(a) Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $3,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.

BE 192
Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.

BE 193
Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?

BE 194
Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.

May 13 Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.

May 16 One defective motor was returned to Charlie.

May 23 Received payment in full from Scruffy Brothers. Round to nearest dollar.

Instructions
Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations. Round amounts to nearest dollar.

BE 195
The income statement for Pepe Serna Company for the year ended December 31, 2015 is as follows:

PEPE SERNA COMPANY
Income Statement
For the Year Ended December 31, 2015
Revenues
Sales revenue $58,000
Interest revenue 3,000
Total revenues 61,000
Expenses
Cost of goods sold $33,000
Salaries and wages expense 13,000
Interest expense 1,000
Total expenses 47,000
Net income $ 14,000

Prepare the entries to close the revenue and expense accounts at December 31, 2015. You may omit explanations for the transactions.

BE 196
Hoyt Company provides this information for the month of November, 2015: sales on credit $170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information.

BE 197
During October, 2015, Red’s Catering Company generated revenues of $14,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.

aBE 198
For each of the following, determine the missing amounts. Beginning Goods Available Cost of Ending Inventory Purchases for Sale Goods Sold Inventory
1. $10,000 ________ $ 45,000 $25,000 _______
2. ______ $220,000 $265,000 _______ $40,000

aBE 199
Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

aBE 200
Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

aBE 201
Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

May 13 Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.

May 16 Returned 1 defective motor to Charlie.

May 23 Paid Charlie Company in full. Round to nearest dollar.

Instructions
Journalize the May transactions for Scruffy Brothers. You may omit explanations.

EXERCISES
Ex. 202
For each of the following, determine the missing amounts. Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
1. $100,000 ________ _______ $30,000 $12,000 2. ________ $135,000 $125,000 _______ $80,000

Ex. 203
On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 40 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.
6 Sold 25 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.
7 Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team Wisconsin for the return of a defective bicycle.
14 Paid Monroe Bicycle Company in full, less discount.

Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ex. 204
On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 70 backpacks at $20 each from Hunter, terms 2/10, n/30.

Sept. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.

Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.

Sept. 14 Paid Hunter in full, less discount.

Instructions
Journalize the September transactions for Reid Supply.

Ex. 205
Sam Wainwright is a new accountant with Ground Floor Company. Ground Floor purchased merchandise on account for $18,000. The credit terms are 1/10, n/30. Sam has talked with the company’s banker and knows that he could earn 4% on any money invested in the company’s savings account.

Instructions
(a) Should Sam pay the invoice within the discount period or should he keep the $18,000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Sam forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $18,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ex. 206
(a) Karns Company purchased merchandise on account from Bailey Office Suppliers for $174,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $156,800 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record:
(1) the purchase of merchandise.
(2) the return of merchandise.
(3) the payment on account.

(b) Hinds Company sold merchandise to Peter Company on account for $146,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $86,140. During the discount period, Peter Company returned $6,000 of merchandise and paid its account in full (minus the discount) by remitting $137,200 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record:
(1) the sale of merchandise.
(2) the return of merchandise.
(3) the collection on account.

Ex. 207
An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions.
1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270.
2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.
3. A $190 sales return was debited to Sales Revenue.
4. A cash payment of $40 for freight on merchandise purchases was debited to Freight-Out $400 and credited to Cash $400.

Instructions
Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.)

Ex. 208
Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system.
(a) Purchased $35,000 of merchandise on account, terms 2/10, n/30. (b) Returned $700 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days.

Ex. 209
Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system.
(a) Eustace sells $45,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
(b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400.
(c) Eustace received the balance due within the discount period.

Ex. 210
Newell Company completed the following transactions in October:

Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection
Oct. 3 $ 600 2/10, n/30 Oct. 8
Oct. 11 1,700 3/10, n/30 Oct. 14 $ 400 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29
Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27
Oct. 23 2,300 2/10, n/30 Oct. 27 400 Oct. 28

Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandise returned had a cost of $140.
(3) Oct. 28 collection.
Newell uses a perpetual inventory system.

Ex. 211
The following information is available for Moiz Company:
Debit Credit
Common Stock $ 30,000
Retained Earnings 20,000
Dividends $ 30,000
Sales Revenue 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 310,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 55,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 23,000

Instructions
Using the above information, prepare the closing entries for Moiz Company.

Ex. 212
The adjusted trial balance of J. W. Hatch Company appears below.

J. W. HATCH
Adjusted Trial Balance
December 31, 2015
Debit Credit
Cash 12,000
Accounts Receivable 25,000
Inventory 35,000
Buildings 140,000
Accumulated Depreciation—
Buildings 20,000
Accounts Payable 12,000
Common Stock 100,000
Retained Earnings 44,000
Dividends 30,000
Sales Revenue 310,000
Sales Discounts 6,000
Sales Returns & Allowances 8,000
Cost of Goods Sold 188,000
Operating Expenses 42,000
486,000 486,000

Instructions
Using the information given, prepare the year-end closing entries.

Ex. 213
Kennedy Company had the following account balances at year-end: cost of goods sold $85,000; inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that inventory on hand is $14,400.

Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries.

Ex. 214
Financial information is presented below for two different companies.

Gower Martini Food
Drugs and Liquor
Sales revenue $90,000 $ (e)
Sales returns and allowances (a) 3,000
Net sales 86,000 95,000
Cost of goods sold 56,000 (f)
Gross profit (b) 36,000
Operating expenses 22,000 (g)
Income from operations (c) (h)
Other expenses and losses 4,000 7,000
Net income (d) 11,000
Ex. 214 (Cont)

Instructions
Determine the missing amounts.

Ex. 215
Presented below is information for Annie Company for the month of March 2015.

Cost of goods sold $245,000 Rent expense $ 36,000
Freight-out 7,000 Sales discounts 8,000
Insurance expense 5,000 Sales returns and allowances 11,000
Salaries and wages expense 63,000 Sales revenue 410,000

Instructions
(a) Prepare a multiple -step income statement.
(b) Compute the gross profit rate.

Ex. 216
In 2015, Rondelli Company had net sales of $650,000 and cost of goods sold of $455,000. Operating expenses were $150,000, and interest expense was $10,000. Rondelli prepares a multiple-step income statement.

Instructions
(a) Compute Rondelli gross profit.
(b) Compute the gross profit rate.
(c) What is Rondelli income from operations and net income?
(d) If Rondelli prepared a single-step income statement, what amount would it report for net income?

Ex. 217
Argentina Company gathered the following condensed data for the year ended December 31, 2015:

Cost of goods sold $ 750,000
Net sales 1,200,000
Operating expenses 275,000
Interest expense 48,000
Dividend revenue 38,000
Casualty loss from vandalism 125,000

Instructions
1. Prepare a single-step income statement for the year ended December 31, 2015.
2. Prepare a multiple-step income statement for the year ended December 31, 2015.

Ex. 218
Instructions
State the missing items identified by ?.
1. Gross profit – Operating expenses = ?
2. Cost of goods sold + Gross profit on sales = ?
3. Sales Revenue – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?

Ex. 219
The adjusted trial balance of Nick Company contained the following information:
Debit Credit
Sales Revenue $570,000
Sales Returns and Allowances $ 15,000
Sales Discounts 7,000
Cost of Goods Sold 323,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 18,000
Salaries and Wages Expense 85,000
Utilities Expense 28,000
Depreciation Expense 7,000
Interest Revenue 27,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2015.

2. Prepare a single-step income statement for the year ended December 31, 2015.

Ex. 220
The following information is available for Sheldon Leonard Company:
Operating expenses $ 85,000 Cost of goods sold 200,000 Sales 325,000
Sales returns and allowances 16,000
Instructions Compute each of the following: (a) Net sales (b) Gross profit (c) Income from operations

aEx. 221
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method.
Instructions
Complete the worksheet below.
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2015

Adjusted
Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit
Cash 11,000
Inventory 19,000
Supplies 3,500
Equipment 80,000
Accum. Depreciation—
Equipment 15,000
Accounts Payable 20,000
Common Stock 50,000
Retained Earnings 42,000
Dividends 8,000
Sales Revenue 39,000
Sales Discounts 2,000
Cost of Goods Sold 25,000
Advertising Expense 7,000
Supplies Expense 6,000
Depreciation Expense 1,000

Ex. 221 (Cont.)

Rent Expense 2,500
Utilities Expense 1,000
166,000 166,000

aEx. 222
Three items are missing in each of the following columns and are identified by letter.
Sales revenue $ (a) $840,000
Sales returns and allowances 15,000 22,000
Sales discounts 10,000 15,000
Net sales 440,000 (d)
Beginning inventory (b) 300,000
Cost of goods purchased 220,000 (e)
Ending inventory 170,000 303,000
Cost of goods sold 252,000 575,000
Gross profit (c) (f)
Ex. 222 (Cont.)

Instructions
Calculate the missing amounts and identify them by letter.

aEx. 223
Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 3 Purchased 90 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.
Sept. 9 Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.
Sept. 13 Paid Zuzu Company in full.

Instructions
Journalize the September transactions for Reineman Supply Company.

aEx. 224
The following information is available for Hopkins Company:
Beginning inventory $ 45,000 Ending inventory 70,000 Freight-in 10,000 Purchases 290,000 Purchase returns and allowances 8,000

Ex. 224 (Cont.)

Instructions Compute each of the following: (a) Net purchases (b) Cost of goods purchased (c) Cost of goods sold

Ex. 225
The income statement of Jue’s Luggage. includes the items listed below:
Net sales $900,000
Gross profit 315,000
Beginning inventory 80,000
Purchase discounts 15,000
Purchase returns and allowances 8,000
Freight-in 10,000
Operating expenses 300,000
Purchases 560,000

Instructions
Use the appropriate items listed above as a basis for determining:
(a) Cost of goods sold.
(b) Cost of goods available for sale.
(c) Ending inventory.

aEx. 226
Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:
(a) Purchased $450,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $30,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.

COMPLETION STATEMENTS
227. A ________________ buys and sells goods rather than performing services to earn a profit.

228. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

229. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

230. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

231. The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.

232. When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.

233. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.

234. Every sales transaction should be supported by a ________________ that provides written evidence of the sale.

235. Gross profit is obtained by subtracting ________________ from ________________.

236. Income from operations is determined by subtracting total operating expenses from ________________.

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

A. Net sales F. FOB shipping point
B. Sales discounts G. Freight-out
C. Purchase invoice H. Gross profit
D. Periodic inventory system I. Operating expenses
E. FOB destination J. Income from operations

1. An incentive to encourage customers to pay their accounts early.
2. Expenses incurred in the process of earning sales revenue.
3. Freight terms that require the seller to pay the freight cost.
4. Sales revenue less sales returns and allowances and sales discounts.
5. A document that supports each credit purchase.
6. Net sales less cost of goods sold.
7. Freight cost to deliver goods to customers reported as a selling expense.
8. Requires a physical count of goods on hand to compute cost of goods sold.
9. Gross profit less total operating expenses.
10. Freight terms that require the buyer to pay the freight cost.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 238
A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

S-A E 239
Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.

S-A E 240
Adrland Caselotti believes revenues from credit sales may be recognized before they are collected in cash. Do you agree? Explain.

S-A E 241
In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

S-A E 242
You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?

S-A E 243
The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

S-A E 244 (Ethics)
Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.
Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.
Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes’s dock. She did not record the purchase until after month end.

Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.

S-A E 245 (Communication)
Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen’s sale was FOB shipping point, and Bryn’s was FOB destination. The company “counts” sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Bryn is quite upset. She has asked you to just include it, or to take Ellen’s off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method.
Write a memo to Bryn. Explain your position.

CHALLENGE EXERCISES
CE 1
Craig Ferguson Company had the following account balances at year-end: cost of goods sold $70,000; inventory $17,300: operating expenses $33,000; sales revenue $121,000; sales discounts $1,400; and sales returns and allowances $1,950. A physical count of inventory determines that merchandise inventory on hand is $16,450.

Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries
(c) Assume that the physical count of inventory indicated that inventory on hand is $17,800 (the account still shows a balance of $17,300 due to errors made during the year. Prepare the adjusting entry necessary as a result of the physical count.
(d) What is Craig Ferguson Company’s net income for the year?

CE 2
In its income statement for the year ended 12/31/15, Hickman Company reported the following condensed data:

Operating expenses $1,042,000 Interest revenue 35,000
Cost of goods sold 1,600,000 Loss on disposal of plant assets 10,000
Interest Expenses 68,000 Net sales 2,850,000

Instructions

(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.
(c) How did Hickman compute the amount it is reporting as net sales?

CE 3
Presented below is financial information for two different companies.
Winn Company Maris Company
Sales revenue $190,000 $ (e)
Sales discounts 2,000 2,500
Sales returns (a) 5,000
Net sales 183,000 210,000
Cost of goods sold 103,000 (f)
Gross profit (b) 80,000
Operating expenses 45,000 (g)
Income from operations (c) 55,000
Other revenues (expenses) 4,000 (h)
Net income (d) 49,000

Instructions

(a) Determine the missing amounts above.
(b) Determine the gross profit rates. (Round to one decimal place.)

CHAPTER 6

INVENTORIES

CHAPTER LEARNING OBJECTIVES
1. Determine how to classify inventory and inventory quantities.
2. Explain the accounting for inventories and apply the inventory cost flow methods.
3. Explain the financial effects of the inventory cost flow assumptions.
4. Explain the lower-of-cost-or-market basis of accounting for inventories.

5. Indicate the effects of inventory errors on the financial statements.

6. Discuss the presentation and analysis of inventory.

a7. Apply the inventory cost flow methods to perpetual inventory records.
a8. Describe the two methods of estimating inventories.

TRUE-FALSE STATEMENTS
1. Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.

2. The more inventory a company has in stock, the greater the company’s profit.

3. Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

4. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.

5. Goods out on consignment should be included in the inventory of the consignor.

6. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

7. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

8. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

9. The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

10. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

11. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

12. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

13. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

14. A company may use more than one inventory costing method concurrently.

15. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

16. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

17. Under the lower-of-cost-or-market basis, market is defined as current replacement cost.

18. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

19. An error that overstates the ending inventory will also cause net income for the period to be overstated.

20. If inventories are valued using the LIFO cost flow assumption, they should not be classified as a current asset on the balance sheet.

21. Inventory turnover is calculated as cost of goods sold divided by ending inventory.

a22. If a company uses the FIFO cost flow assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.

a23. In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.

a24. Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.

a25. The retail inventory method requires a company to value its inventory on the balance sheet at retail prices.

26. Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.

27. Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.

28. The cost of goods available for sale consists of the beginning inventory plus the cost of goods purchased.

29. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.

30. The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.

31. Inventories are reported in the current assets section of the balance sheet immediately below receivables.

a32. In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.

a33. The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.

MULTIPLE CHOICE QUESTIONS
34. Inventories affect
a. only the balance sheet.
b. only the income statement.
c. both the balance sheet and the income statement.
d. neither the balance sheet nor the income statement.

35. Inventory is
a. reported under the classification of Property, Plant, and Equipment on the balance sheet.
b. often reported as a miscellaneous expense on the income statement.
c. reported as a current asset on the balance sheet.
d. generally valued at the price for which the goods can be sold.

36. Items waiting to be used in production are considered to be
a. raw materials.
b. work in progress.
c. finished goods.
d. merchandise inventory.

37. In a manufacturing business, inventory that is ready for sale is called
a. raw materials inventory.
b. work in process inventory.
c. finished goods inventory.
d. store supplies inventory.

38. The factor which determines whether or not goods should be included in a physical count of inventory is
a. physical possession.
b. legal title.
c. management’s judgment.
d. whether or not the purchase price has been paid.

39. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.

40. An auto manufacturer would classify vehicles in various stages of production as
a. finished goods.
b. merchandise inventory.
c. raw materials.
d. work in process.

41. Which of the following should be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods in transit to another company shipped FOB shipping point.
c. Goods in transit from another company shipped FOB shipping point.
d. Goods in transit to or from another company shipped FOB shipping point.

42. Manufacturers usually classify inventory into all the following general categories except
a. work in process
b. finished goods
c. merchandise inventory
d. raw materials

43. Freight terms of FOB shipping point mean that the
a. seller must debit freight out.
b. buyer must bear the freight costs.
c. goods are placed free on board at the buyer’s place of business.
d. seller must bear the freight costs.

44. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except
a. to check the accuracy of the records.
b. to determine the amount of wasted raw materials.
c. to determine losses due to employee theft.
d. to determine ownership of the goods.

45. Fetherston Company’s goods in transit at December 31 include:
sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB shipping point (4) FOB shipping point
Which items should be included in Fetherston’s inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)

46. The term “FOB” denotes
a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.

47. Under a consignment arrangement, the
a. consignor has ownership until goods are sold to a customer.
b. consignor has ownership until goods are shipped to the consignee.
c. consignee has ownership when the goods are in the consignee’s possession.
d. consigned goods are included in the inventory of the consignee.

48. As a result of a thorough physical inventory, Horace Company determined that it had inventory worth $320,000 at December 31, 2015. This count did not take into consideration the following facts: Herschel Consignment currently has goods worth $47,000 on its sales floor that belong to Horace but are being sold on consignment by Herschel. The selling price of these goods is $75,000. Horace purchased $22,000 of goods that were shipped on December 27, FOB destination, that will be received by Horace on January 3. Determine the correct amount of inventory that Horace should report.
a. $320,000.
b. $340,000.
c. $367,000.
d. $387,000.

49. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and sales during the month of January were as follows:
Date Purchases Sales
Jan. 14 375 @ $14
17 250 @ $10
25 250 @ $11
29 260 @ $16

Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31.

The cost of the inventory at January 31, under the FIFO method is:
a. $3,285.
b. $3,650.
c. $3,900.
d. $4,015.

50. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and sales during the month of January were as follows:
Date Purchases Sales
Jan. 14 375 @ $14
17 250 @ $10
25 250 @ $11
29 260 @ $16

Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31.

The cost of the inventory at January 31, under the LIFO method is:
a. $3,285.
b. $3,650.
c. $3,900.
d. $4,015.

51. Nick’s Place recorded the following data:
Units Unit
Date Received Sold On Hand Cost
1/1 Inventory 600 $2.50
1/8 Purchased 1,000 1,600 3.00
1/12 Sold 1,200 300

The weighted average unit cost of the inventory at January 31 is:
a. $2.50.
b. $2.75.
c. $2.81.
d. $3.400.

52. Inventoriable costs include all of the following except the
a. freight costs incurred when buying inventory.
b. costs of the purchasing and warehousing departments.
c. cost of the beginning inventory.
d. cost of goods purchased.

53. Beginning inventory plus the cost of goods purchased equals
a. cost of goods sold.
b. cost of goods available for sale.
c. net purchases.
d. total goods purchased.

54. Cost of goods sold is computed from the following equation:
a. beginning inventory – cost of goods purchased + ending inventory.
b. sales – cost of goods purchased + beginning inventory – ending inventory.
c. sales + gross profit – ending inventory + beginning inventory.
d. beginning inventory + cost of goods purchased – ending inventory.

55. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $64; Second purchase $76; Third purchase $68. If the company sold two units for a total of $200 and used FIFO costing, the gross profit for the period would be
a. $56.
b. $60.
c. $62.
d. $68.

56. The LIFO inventory method assumes that the cost of the latest units purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.

57. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115

A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $683.
b. $825.
c. $1,290.
d. $1,432.

58. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115

A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is
a. $683.
b. $825.
c. $1,290.
d. $1,432.

59. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115

A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is
a. $683.
b. $755.
c. $825.
d. $1,360.

60. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115

A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand.
The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the weighted average unit cost method.
d. not determinable.

61. A company purchased inventory as follows:
150 units at $5
350 units at $6
The average unit cost for inventory is
a. $5.00.
b. $5.50.
c. $5.70.
d. $6.00.

62. Which of the following items will increase inventoriable costs for the buyer of goods?
a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser
c. Freight charges paid by the seller
d. Freight charges paid by the purchaser

63. Inventoriable costs may be thought of as a pool of costs consisting of which two elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the year
c. The cost of beginning inventory and the cost of goods purchased during the year
d. The difference between the costs of goods purchased and the cost of goods sold during the year

64. The cost of goods available for sale is allocated between
a. beginning inventory and ending inventory.
b. beginning inventory and cost of goods on hand.
c. ending inventory and cost of goods sold.
d. beginning inventory and cost of goods purchased.

65. Indrisano’s Used Cars uses the specific identification method of costing inventory. During March, Indrisano purchased three cars for $12,000, $14,400, and $19,200, respectively. During March, two cars are sold for a total of $34,600. Indrisano determines that at March 31, the $14,400 car is still on hand. What is Indrisano’s gross profit for March?
a. $1,000.
b. $3,400.
c. $4,200.
d. $8,200.

66. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
a. Music store specializing in organ sales
b. Farm implement dealership
c. Antique shop
d. Hardware store

67. A problem with the specific identification method is that
a. inventories can be reported at actual costs.
b. management can manipulate income.
c. matching is not achieved.
d. the lower-of-cost-or-market basis cannot be applied.

68. The selection of an appropriate inventory cost flow assumption for an individual company is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.

69. Which one of the following inventory methods is often impractical to use?
a. Specific identification
b. LIFO
c. FIFO
d. Average cost

70. Which of the following is not a common cost flow assumption used in costing inventory?
a. First-in, first-out
b. Middle-in, first-out
c. Last-in, first-out
d. Average cost

71. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is
a. called the expense recognition principle.
b. called the consistency principle.
c. nonexistent; that is, there is no accounting requirement.
d. called the physical flow assumption.

72. Which of the following statements is true regarding inventory cost flow assumptions?
a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign operations.
d. A company may never change its inventory costing method once it has chosen a method.

73. Which of the following statements is correct with respect to inventories?
a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

74. The cost of goods available for sale is allocated to the cost of goods sold and the
a. beginning inventory.
b. ending inventory.
c. cost of goods purchased.
d. gross profit.

75. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. The average cost per unit for May is
a. $7.000.
b. $7.375.
c. $7.500.
d. $8.000.

76. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. The value of Kibbee’s inventory at May 31, 2015 is
a. $3,000.
b. $4,425.
c. $4,500.
d. $7,500.

77. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. Kibbee’s gross profit for the month of May is
a. $4,625.
b. $4,571.
c. $4,000.
d. $4,500.

78. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550

An end of the month (1/31/15) inventory showed that 160 units were on hand. How many units did the company sell during January, 2015?
a. 60
b. 160
c. 200
d. 240

79. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550

An end of the month (1/31/15) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory?
a. $800
b. $832
c. $848
d. $868

80. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550

An end of the month (1/31/15) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory?
a. $800
b. $832
c. $848
d. $868

81. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550

An end of the month (1/31/15) inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?
a. $1,120
b. $1,188
c. $1,532
d. $1,600

82. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method.
Under the FIFO method, the December 31 inventory is valued at
a. $28,000.
b. $32,267.
c. $32,960.
d. $36,800.

83. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the cost of goods available for sale?
a. $169,200
b. $178,000
c. $206,000
d. $325,000

84. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the LIFO method, cost of goods sold is
a. $28,000.
b. $169,200.
c. $173,040.
d. $178,000.

85. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. The weighted-average cost per unit is
a. $8.00.
b. $8.01.
c. $8.24.
d. $9.30.

86. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. If the company uses FIFO, what is the gross profit for the period?
a. $95,000
b. $99,266
c. $99,960
d. $103,800

87. Eneri Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00

A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used?
a. $1,760 additional taxes
b. $992 additional taxes
c. $786 additional taxes
d. $992 tax savings

88. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010

A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the average-cost method, the value of ending inventory is
a. $680.
b. $704.
c. $723.
d. $730.

89. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010

A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is
a. $1,280.
b. $1,287
c. $1,306.
d. $1,330.

90. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010

A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is
a. $1,280.
b. $1,287.
c. $1,306.
d. $1,330.

91. Moroni Industries has the following inventory information.
July 1 Beginning Inventory 40 units at $120
5 Purchases 240 units at $112
14 Sale 160 units
21 Purchases 120 units at $115
30 Sale 140 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?
a. $11,500
b. $11,520
c. $33,960
d. $33,980

92. Moroni Industries has the following inventory information.
July 1 Beginning Inventory 40 units at $120
5 Purchases 240 units at $112
14 Sale 160 units
21 Purchases 120 units at $115
30 Sale 140 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
a. $11,500
b. $11,520
c. $33,960
d. $33,980

93. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Cost of goods sold (rounded to the nearest dollar) under the average-cost method is
a. $1,740.
b. $1,772.
c. $1,778.
d. $1,794.

94. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is
a. $738.
b. $792.
c. $1,740.
d. $1,794.

95. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is
a. $738.
b. $792.
c. $1,740.
d. $1,794.

96. Netta Shutters has the following inventory information.

Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Assuming that the specific identification method is used and that ending inventory consists of 20 units from each of the three purchases and 30 units from the November 1 inventory, cost of goods sold is
a. $1,740.
b. $1,772.
c. $1,782.
d. $1,794.

97. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49

The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)
a. $3,318
b. $3,552
c. $6,948
d. $7,182

98. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49

The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using LIFO? (rounded to whole dollars)
a. $2,323
b. $2,486
c. $3,318
d. $3,552

99. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49

The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)
a. $3,318
b. $3,552
c. $6,948
d. $7,182

100. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49

The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars)
a. $2,322
b. $2,486
c. $3,318
d. $3,552

101. Companies adopt different cost flow methods for each of the following reasons except
a. balance sheet effects.
b. cost effects.
c. income statements effects.
d. tax effects.

102. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. tax method.

103. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
a. LIFO will have the highest ending inventory.
b. FIFO will have the highest cost of good sold.
c. FIFO will have the highest ending inventory.
d. LIFO will have the lowest cost of goods sold.

104. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods available for sale of the companies will be identical.
c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.

105. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?
a. FIFO
b. LIFO
c. Average Cost
d. Income tax expense for the period will be the same under all assumptions.

106. The specific identification method of costing inventories is used when the
a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneous items.
c. company sells large quantities of relatively low cost heterogeneous items.
d. company sells a limited quantity of high-unit cost items.

107. The specific identification method of inventory costing
a. always maximizes a company’s net income.
b. always minimizes a company’s net income.
c. has no effect on a company’s net income.
d. may enable management to manipulate net income.

108. The managers of Constantine Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?
a. LIFO
b. Average Cost
c. FIFO
d. Physical inventory method

109. In periods of inflation, phantom or paper profits may be reported as a result of using the
a. perpetual inventory method.
b. FIFO costing assumption.
c. LIFO costing assumption.
d. periodic inventory method.

110. Selection of an inventory costing method by management does not usually depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.

111. In a period of rising prices, the costs allocated to ending inventory may be understated in the
a. average-cost method.
b. FIFO method.
c. gross profit method.
d. LIFO method.

112. The accountant at Almira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $8,190. The LIFO method will result in income before taxes of $7,290. What is the difference in tax that would be paid between the two methods?
a. $270.
b. $630.
c. $900.
d. Cannot be determined from the information provided.

113. The accountant at Cedric Company has determined that income before income taxes amounted to $7,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $315 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?
a. $5,950
b. $7,000
c. $7,315
d. $8,050

114. The manager of Brick Company is given a bonus based on income before income taxes. Net income, after taxes, is $11,200 for FIFO and $9,800 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager’s bonus if FIFO is adopted instead of LIFO?
a. $84
b. $2,800
c. $400
d. $420

115. The consistent application of an inventory costing method is essential for
a. conservatism.
b. accuracy.
c. comparability.
d. efficiency.

116. Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-market is applied?
a. Specific identification
b. FIFO
c. LIFO
d. All of these methods can be used.

117. Inventory is reported in the financial statements at
a. cost.
b. market.
c. the higher-of-cost-or-market.
d. the lower-of-cost-or-market.

118. The lower-of-cost-or-market basis of valuing inventories is an example of
a. comparability.
b. the cost principle.
c. conservatism.
d. consistency.

119. Under the lower-of-cost-or-market basis in valuing inventory, market is defined as
a. current replacement cost.
b. selling price.
c. historical cost plus 10%.
d. selling price less markup.

120. The lower-of-cost-or-market (LCM) basis may be used with all of the following methods except
a. average cost.
b. FIFO.
c. LIFO.
d. The LCM basis may be used with all of these.

121. Alfalfa Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories:
Product Cost Market
A $112,000 $120,000
B 80,000 76,000
C 155,000 162,000
If Alfalfa applies the LCM basis, the value of the inventory reported on the balance sheet would be
a. $343,000.
b. $347,000.
c. $358,000.
d. $362,000.

122. Switzer, Inc. has 8 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. What value should Switzer, Inc., have for the computers at the end of the year?
a. $2,400.
b. $3,200.
c. $4,800.
d. $7,200.

123. Switzer, Inc. has 8 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. How much loss should Switzer, Inc., record for the year?
a. $1,600.
b. $2,400.
c. $3,200.
d. $4,000.

124. Othello Company understated its inventory by $20,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Othello’s stockholder’s equity was:
a. understated at December 31, 2014, and overstated at December 31, 2015.
b. understated at December 31, 2014, and properly stated at December 31, 2015.
c. overstated at December 31, 2014, and overstated at December 31, 2015.
d. understated at December 31, 2014, and understated at December 31, 2015.

125. Understating beginning inventory will understate
a. assets.
b. cost of goods sold.
c. net income.
d. stockholder’s equity.

126. An error in the physical count of goods on hand at the end of a period resulted in a $15,000 overstatement of the ending inventory. The effect of this error in the current period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

127. If beginning inventory is understated by $13,000, the effect of this error in the current period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

128. A company uses the periodic inventory method and the beginning inventory is overstated by $7,000 because the ending inventory in the previous period was overstated by $7,000. The amounts reflected in the current end of the period balance sheet are
Assets Stockholder’s Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct

129. Overstating ending inventory will overstate all of the following except
a. assets.
b. cost of goods sold.
c. net income.
d. stockholder’s equity.

130. Disclosures about inventory should include each of the following except the
a. basis of accounting.
b. costing method.
c. quantity of inventory.
d. major inventory classifications.

131. Days in inventory is calculated by dividing
a. the inventory turnover by 365 days.
b. average inventory by 365 days.
c. 365 days by the inventory turnover.
d. 365 days by average inventory.

132. The following information is available for Everett Company at December 31, 2015: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $1,050,000; and sales $1,800,000. Everett’s inventory turnover in 2015 is
a. 8.7 times.
b. 10.5 times.
c. 13.2 times.
d. 18 times.

133. The following information was available for Pete Company at December 31, 2015: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and sales $1,350,000. Pete’s inventory turnover in 2015 was
a. 10.9 times.
b. 12.3 times.
c. 14.1 times.
d. 16.9 times.

134. The following information was available for Pete Company at December 31, 2015: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and sales $1,350,000. Pete’s days in inventory in 2015 was
a 21.6 days.
b. 25.9 days.
c. 29.7 days.
d. 33.5 days.

135. Delmar Company had beginning inventory of $90,000, ending inventory of $110,000, cost of goods sold of $600,000, and sales of $960,000. Delmar’s days in inventory is:
a 38.0 days.
b. 54.3 days.
c. 60.8 days.
d. 67.5 days.

a136. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.

Purchases Sales
July 3 40 units @ $12 July 13 50 units
11 40 units @ $13 22 20 units
20 20 units @ $15

Under the FIFO method, the cost of goods sold for each sale is:
July 13 July 22
a. $600 $240
b. 610 260
c. 650 260
d. 750 300

a137. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.

Purchases Sales
July 3 40 units @ $12 July 13 50 units
11 40 units @ $13 22 20 units
20 20 units @ $15

Under the LIFO method, the cost of goods sold for each sale is:
July 13 July 22
a. $600 $240
b. 640 300
c. 650 300
d. 750 260

a138. Pappy’s Staff has the following inventory information.
July 1 Beginning Inventory 20 units at $90
5 Purchases 120 units at $92
14 Sale 80 units
21 Purchases 60 units at $95
30 Sale 56 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis?
a. $5,848
b. $5,860
c. $6,068
d. $6,346

a139. Pappy’s Staff Junkets has the following inventory information.
July 1 Beginning Inventory 20 units at $90
5 Purchases 120 units at $92
14 Sale 80 units
21 Purchases 60 units at $95
30 Sale 56 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis?
a. $5,848
b. $5,860
c. $6,068
d. $6,346

a140. Langer Company has the following inventory information.
July 1 Beginning Inventory 10 units at $90
5 Purchases 60 units at $92
14 Sale 40 units
21 Purchases 30 units at $95
30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the ending inventory (round all calculations to nearest dollar) under the moving-average cost method?
a. $2,930
b. $2,966
c. $2,986
d. $3,054

141. A new average cost is computed each time a purchase is made in the
a. average-cost method.
b. moving-average cost method.
c. weighted-average cost method.
d. All of these choices are correct.

a142. When valuing ending inventory under a perpetual inventory system, the
a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumption under the periodic inventory system.
b. moving average requires that a new average be computed after every sale.
c. valuation using the FIFO assumption is the same as under the periodic inventory system.
d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold.

a143. Sawyer Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $30,000 in the beginning inventory. On August 10, 20,000 units were purchased for $6 per unit. On August 15, 24,000 units were sold for $12 per unit. The amount charged to cost of goods sold on August 15 was
a. $30,000.
b. $108,000.
c. $120,000.
d. $144,000.

a144. Under the gross profit method, each of the following items are estimated except for the
a. cost of ending inventory.
b. cost of goods sold.
c. cost of goods purchased.
d. gross profit.

a145. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by
a. net sales.
b. goods available for sale at retail.
c. goods purchased at retail.
d. ending inventory at retail.

a146. Inventories are estimated
a. more frequently under a periodic inventory system than a perpetual inventory system.
b. using the wholesale inventory method.
c. more frequently under a perpetual inventory system than the periodic inventory system.
d. using the net method.

a147. Clooney Department Store estimates inventory by using the retail inventory method. The following information was developed:
At Cost At Retail
Beginning inventory $360,000 $ 750,000
Goods purchased 900,000 1,350,000
Net sales 1,400,000
The estimated cost of the ending inventory is
a. $280,000.
b. $336,000.
c. $420,000.
d. $466,667.

a148. Turturro Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $600,000 and goods were sold during the period for $420,000. The estimated cost of the ending inventory is
a. $135,000.
b. $180,000.
c. $315,000.
d. $450,000.

a149. TB Nelson Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $180,000; the beginning inventory on June 1 was $54,000; and the cost of goods purchased during June amounted to $90,000. The estimated cost of TB Nelson Company’s inventory on June 30 is
a. $21,600.
b. $36,000.
c. $72,000.
d. $126,000.

150. Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

151. Inventory items on an assembly line in various stages of production are classified as
a. Finished goods.
b. Work in process.
c. Raw materials.
d. Merchandise inventory.

152. The cost flow method that often parallels the actual physical flow of merchandise is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. gross profit method.

153. Goodman Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.00
Purchases: June 18 9,000 8.20
November 8 6,000 7.00
A physical inventory on December 31 shows 6,000 units on hand. Under the FIFO method, the December 31 inventory is
a. $42,000.
b. $49,200.
c. $49,392.
d. $54,000.

154. In a period of inflation, the cost flow method that results in the lowest income taxes is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. gross profit method.

155. In a period of rising prices, FIFO will have
a. lower net income than LIFO.
b. lower cost of goods sold than LIFO.
c. lower income tax expense than LIFO.
d. lower net purchases than LIFO.

156. Under the LCM approach, the market value is defined as
a. FIFO cost.
b. LIFO cost.
c. current replacement cost.
d. selling price.

157. Penny Company made an inventory count on December 31, 2015. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, 2015, the effects of this error are
Assets Liabilities Stockholder’s Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated no effect overstated
d. overstated overstated understated

158. The inventory turnover is computed by dividing cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.

a159. H. Hunter Company’s records indicate the following information for the year:
Merchandise inventory, 1/1 $ 550,000
Purchases 2,250,000
Net sales 3,200,000
On December 31, a physical inventory determined that ending inventory of $500,000 was in the warehouse. H. Hunter’s gross profit on sales has remained constant at 30%.
H. Hunter suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory?
a. $60,000
b. $100,000
c. $150,000
d. $1,340,000

160. The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.

161. The major IFRS requirements related to accounting for and reporting inventories are
a. the same as GAAP.
b. the same as GAAP with a couple of exceptions.
c. completely different from GAAP.
d. not comparable to GAAP.

162. Inventory accounting under IFRS differs from GAAP in regard to
a. neither the use of LIFO nor lower-of-cost-or-market.
b. the use of LIFO but not lower-of-cost-or-market.
c. the use of lower-of-cost-or-market but not LIFO.
d. the use of LIFO and lower-of-cost-or-market.

163. Under GAAP, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

164. Under IFRS, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. No No

165. GAAP’s definition for inventory and provision of guidelines for inventory accounting, as compared to IFRS are:
Definitions for Inventory Guideliness for inventory accounting
a. essentially similar more detailed
b. essentially different more detailed
c. essentially similar less detailed
d. essentially different less detailed

166. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the providing of services.
d. All of these answers are correct.

167. Specific Identification can be used for inventory valuation under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

168. Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

169. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are:
Ownership of goods Costs to include in inventory
a. essentially similar essentially similar
b. essentially different essentially different
c. essentially similar essentially different
d. essentially different essentially similar

170. The only acceptable cost flow assumptions under IFRS are
a. FIFO and LIFO.
b. FIFO and average.
c. LIFO and average.
d. FIFO, LIFO and average.

171. LIFO can be used
a. under neither GAAP nor IFRS.
b. under IFRS but not GAAP.
c. under GAAP but not IFRS.
d. under both GAAP and IFRS.

172. The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

173. IFRS defines market for lower-of-cost-or market as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.

174. GAAP defines market for lower-of-cost-or market essentially as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.

175. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

176. The option to value inventory at fair value exists under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

177. Certain agricultural and mineral products can be reported at net realizable value under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

178. The convergence issue that will be most difficult to resolve in the area of inventory accounting is:
a. FIFO.
b. LIFO.
c. ownership of goods.
d. costs to include in inventory.

179. The specific identification method
a. cannot be used under GAAP.
b. cannot be used under IFRS.
c. must be used under IFRS if the inventory items can be specifically identified.
d. must be used under IFRS if it would result in the lowest net income.

BRIEF EXERCISES
BE 180
Waegelein Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking.
1. Goods shipped on consignment by Waegelein to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point.
4. Goods held on consignment from another company.

BE 181
In the first month of operations, Mordica Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $9. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Mordica uses a periodic inventory system.

BE 182
Flaherty Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $40,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $15,500.

Calculate cost of goods available for sale and cost of goods sold for the month.

BE 183
Shellhammer Company’s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.

BE 184
Shellhammer Company’s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70

A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system.

BE 185
Shellhammer Company’s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70
BE 185 (Cont.)
A physical inventory on September 30 shows 200 units on hand. Calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar.

BE 186
The following accounts are included in the ledger of Wainwright Company:

Advertising expense
Freight-in
Inventory
Purchases
Purchase returns and allowances
Sales revenue
Sales returns and allowances

Which of the accounts would be included in calculating cost of goods sold?

BE 187
The Vogelson Company accumulates the following cost and market data at December 31.
Inventory Categories Cost Data Market Data
Camera $11,000 $9,900
Camcorders 7,800 8,500
DVDs 14,000 12,000

What is the lower-of-cost-or-market value of the inventory?

BE 188
Garner Supply Company reports net income of $120,000 in 2015. The ending inventory did not include goods valued at $7,000 that Garner had consigned to Sharif’s Gift Shop.

(1) What is the correct net income for 2015?
(2) What impact will this error have on the balance sheet at 12/31/15?

BE 189
At December 31, 2015, the following information was available for Deen Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue $430,000.

Calculate the inventory turnover and days in inventory for Deen.

EXERCISES
Ex. 190
The following information is available for Yancey Company:
Beginning inventory 600 units at $4 First purchase 900 units at $6 Second purchase 500 units at $7.20

Assume that Yancey uses a periodic inventory system and that there are 700 units left at the end of the month.

Ex. 190 (Cont.)
Instructions Compute the cost of ending inventory under the
(a) FIFO method.
(b) LIFO method.

Ex. 191
The following information is available for Yancey Company:
Beginning inventory 600 units at $4 First purchase 900 units at $6 Second purchase 500 units at $7.20

Assume that Yancey uses a periodic inventory system and that there are 700 units left at the end of the month.

Instructions Compute each of the following under the average-cost method:
(a) Cost of ending inventory.
(b) Cost of goods sold.

Ex. 192
Shanrock Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 400 $6 2,400
7/25 Purchase 200 $7 1,400
10/20 Purchase 300 $8 2,400
1,000 $6,600

A physical count of inventory on December 31 revealed that there were 400 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.

2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 193
Lester Company sells many products. Hackenberry is one of its popular items. Below is an analysis of the inventory purchases and sales of Hackenberry for the month of March. Lester Company uses the periodic inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Sales 60 $90
3/25 Sales 40 $90
3/30 Purchase 40 $60

Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ex. 194
Gray Company uses the periodic inventory system to account for inventories. Information related to Gray Company’s inventory at October 31 is given below:
October 1 Beginning inventory 400 units @ $9.80 = $ 3,920
8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.80 = 2,360
Total units and cost 2,000 units $21,080

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31.

Ex. 195
Ford Co. uses a periodic inventory system. Its records show the following for the month of May, in which 75 units were sold.
Units Unit Cost Total Cost
May 1 Inventory 35 $ 8 $ 280
15 Purchases 30 12 360
24 Purchases 40 13 520
Totals 105 $1,160

Instructions Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.

Ex. 196
Washington Bottom Company reports the following for the month of June.

Units Unit Cost Total Cost
June 1 Inventory 300 $5 $1,500
12 Purchase 450 6 2,700
23 Purchase 750 8 6,000
30 Inventory 180

Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO.
(b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost method.

Ex. 197
Queen Company is in the electronics industry and the price it pays for inventory is decreasing. Instructions Indicate which inventory method will: a. provide the highest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income. d. result in the lowest income tax expense. e. produce the most stable earnings over several years.

Ex. 198
Vance Company reported the following summarized annual data at the end of 2015:
Sales revenue $1,000,000
Cost of goods sold* 600,000
Gross margin 400,000
Operating expenses 250,000
Income before income taxes $ 150,000
*Based on an ending FIFO inventory of $250,000.

The income tax rate is 40%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $180,000.

Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Vance’s income tax expense, net income, and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed change?

Ex. 199
Compute the lower-of-cost-or-market valuation for Gantner Company’s total inventory based on the following: Inventory Categories Cost Data Market Data
A $18,000 $16,900 B 13,900 14,600 C 21,000 20,500

Ex. 200
The controller of Alt Company is applying the lower-of-cost-or-market basis of valuing its ending inventory. The following information is available:
Cost Market
Lawnmowers:
Self-propelled $14,800 $17,000
Push type 19,000 18,000
Total 33,800 35,000

Snowblowers:
Manual 29,800 31,000
Self-start 19,000 21,000
Total 48,800 52,000
Total inventory $82,600 $87,000

Instructions
Compute the value of the ending inventory by applying the lower-of-cost-or-market basis.

Ex. 201
Nolen Company is preparing the annual financial statements dated December 31, 2015. Information about inventory stocked for regular sale follows:

Quantity Unit Cost Replacement Cost
Item on Hand When Acquired (market) at year end
A 50 $20 $19
B 100 45 45
C 20 59 62
D 40 40 36

Instructions
Compute the valuation for the December 31, 2015, inventory using the lower-of-cost-or-market basis.

Ex. 202
Foley Company applied FIFO to its inventory and got the following results for its ending inventory.
DVRs 140 units at a cost per unit of $59
DVD players 210 units at a cost per unit of $75
iPods 175 units at a cost per unit of $80

The cost of purchasing units at year-end was DVRs $71, DVD players $68, and iPods $78.

Instructions
Determine the amount of ending inventory at lower-of-cost-or-market.

Ex. 203
Morton Watch Company reported the following income statement data for a 2-year period.

2014 2015
Sales revenue $260,000 $320,000
Cost of goods sold
Beginning inventory 32,000 44,000
Cost of goods purchased 193,000 225,000
Cost of goods available for sale 225,000 269,000
Ending inventory 44,000 57,000
Cost of goods sold 181,000 212,000
Gross profit $ 79,000 $108,000

Morton uses a periodic inventory system. The inventories at January 1, 2014, and December 31, 2015, are correct. However, the ending inventory at December 31, 2014, was overstated $5,000.

Instructions (a) Prepare correct income statement data for the 2 years. (b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Ex. 204
Wellington Company reported net income of $60,000 in 2014 and $80,000 in 2015. However, ending inventory was overstated by $7,000 in 2014. Instructions Compute the correct net income for Wellington Company for 2014 and 2015.

Ex. 205
For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected

Events Items
Assets Stockholder’s Equity Cost of Goods Sold Net Income
1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.
2. The ending inventory in the previous period was overstated.
3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.
4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.
5. The internal auditors discovered that the ending inventory in the previous period was understated $17,000 and that the ending inventory in the current period was overstated $27,000.

Ex. 206
Baden’s Hardware Store prepared the following analysis of cost of goods sold for the previous three years:
2014 2015 2016
Beginning inventory 1/1 $40,000 $18,000 $25,000
Cost of goods purchased 50,000 55,000 70,000
Cost of goods available for sale 90,000 73,000 95,000
Ending inventory 12/31 18,000 25,000 40,000
Cost of goods sold $72,000 $48,000 $55,000

Net income for the years 2014, 2015, and 2016 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Baden hired a new accountant to investigate the cause(s) for the declines.

The accountant determined the following:
1. Purchases of $25,000 were not recorded in 2014.
2. The 2014 December 31 inventory should have been $24,000.
3. The 2015 ending inventory included inventory costing $5,000 that was purchased FOB destination and in transit at year end.
4. The 2016 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.

Instructions
Determine the correct net income for each year. (Show all computations.)

Ex. 207
Galena Pharmacy reported cost of goods sold as follows:

2015 2016
Beginning inventory $ 54,000 $ 64,000
Cost of goods purchased 847,000 891,000
Cost of goods available for sale 901,000 955,000
Ending inventory 64,000 55,000
Cost of goods sold $837,000 $900,000

Jim Holt, the bookkeeper, made two errors:
(1) 2015 ending inventory was overstated by $7,000.
(2) 2016 ending inventory was understated by $16,000.

Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U).
2015 2016
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $_________ _______ $_________ _______

Stockholder’s equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Net income $_________ _______ $_________ _______

Ex. 208
This information is available for Eaton’s Photo Corporation for 2014 and 2015.
2014 2015
Beginning inventory $ 200,000 $ 300,000
Ending inventory 300,000 380,000
Cost of goods sold 1,150,000 1,330,000
Sales revenue 1,600,000 1,900,000

Instructions Calculate inventory turnover, days in inventory, and gross profit rate for Eaton’s Photo Corporation for 2014 and 2015. Comment on any trends.

Ex. 209
The following information is available for Heller Company:
Beginning inventory $ 60,000 Cost of goods sold 640,000 Ending inventory 100,000 Sales revenue 1,000,000

Instructions Compute each of the following: (a) Inventory turnover. (b) Days in inventory.

aEx. 210
Winsor Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May:

May 1 Beginning inventory 20 units @ $5
10 Purchase 20 units @ $8
15 Sales 15 units
18 Purchase 10 units @ $9
21 Sales 15 units
30 Purchase 10 units @ $10

Instructions
Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May.

aEx. 211
Norris Company uses the perpetual inventory system and had the following purchases and sales during March.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Purchase 40 $60
3/25 Sales 120 $90

Instructions
Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO.

aEx. 212
Shoemaker Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July:
At Cost At Retail
Beginning inventory $ 30,000 $ 50,000
Merchandise purchases 99,000 150,000

The net sales for July amounted to $142,000.

Instructions
Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer.

aEx. 213
Agler Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Agler Company developed the following information:

March net sales through March 28 $350,000
Beginning Inventory, March 1 100,000
Merchandise purchases through March 28 180,000

The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period.

Instructions
Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form.

aEx. 214
The inventory of Columbo Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained:

Sales Revenue $185,000
Sales Returns and Allowances 5,000
Purchases 110,000
Freight-In 3,500
Purchase Returns and Allowances 4,000

Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and a gross profit rate of 40% on net sales.

aEx. 215
Talkington Rae Company reports goods available for sale at cost, $76,800. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $85,000.

Instructions
Determine the estimated cost of the ending inventory using the retail inventory method.

COMPLETION STATEMENTS
216. Accounting for inventories is important because inventories affect the ______________ section of the balance sheet and the ______________ section on the income statement.

217. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________.

218. The cost of goods purchased during a period plus the beginning inventory is the amount of goods ________________ during the period.

219. Inventoriable costs are allocated to ______________ and cost of goods ____________.

220. It is generally recognized that a major objective of accounting for inventory is the proper determination of ______________.

221. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method.

222. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used.

223. The lower-of-cost-or-market basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost.

224. ______________ is calculated as cost of goods sold divided by average inventory.

a225. Two widely used methods of estimating inventories are the ______________ method and the _____________ method.

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

A. Merchandise Inventory F. First-in, first-out (FIFO) method
B. Work in process G. Last-in, first-out (LIFO) method
C. FOB shipping point H. Average-cost method
D. FOB destination I. Inventory turnover
E. Specific identification method J. Current replacement cost

1. Measures the number of times the inventory sold during the period.
2. Tracks the actual physical flow for each inventory item available for sale.
3. Goods that are only partially completed in a manufacturing company.
4. Cost of goods sold consists of the most recent inventory purchases.
5. Goods ready for sale to customers by retailers and wholesalers.
6. Title to the goods transfers when the public carrier accepts the goods from the seller.
7. Ending inventory valuation consists of the most recent inventory purchases.
8. The same unit cost is used to value ending inventory and cost of goods sold.
9. Title to goods transfers when the goods are delivered to the buyer.
10. The amount that would be paid at the present time to acquire an identical item.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 227
FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

S-A E 228
In a period of rising prices, the inventory reported in Crawford Company’s balance sheet is close to the current cost of the inventory. Breland Company’s inventory is considerably below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit?

S-A E 229
Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year?

S-A E 230
A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.

Required:
Provide brief, yet concise responses to the following questions.
a. Why are LIFO and FIFO so popular?
b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification?

S-A E 231
Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?”

What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO.

S-A E 232
Robert Tingle is studying for the next accounting mid-term examination. What should Robert know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of “market” in the lower-of-cost-or-market method?

S-A E 233 (Ethics)
Glenda Good and Danny Rock are department managers in the housewares and shoe departments, respectively, for Litwins, a large department store. Danny has observed Glenda taking inventory from her own department home, apparently without paying for it. He hesitates confronting Glenda because he is due to be promoted, and needs Glanda’s recommendation. He also does not want to notify the company management directly, because he doesn’t want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Glenda tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Danny relaxes. “The system will catch Glenda now,” he says to himself.

Required:
1. Is Danny’s attitude justified? Why or why not?
2. What, if any, action should Danny take now?

S-A E 234 (Communication)
Frank Jeffries, a new employee of Stine Company, recorded $1,000 in consigned goods received as part of the firm’s inventory. The goods were received one day after the end of the fiscal period, but Frank reasoned that the goods should be included in inventory sooner because Stine paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Stine inventory at all. Frank told Sara Janik, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Frank’s opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Janik has reported the problem to the accounting department.

Required:
You are Frank’s supervisor. Write a memo to Frank explaining why the error should have been corrected.

CHALLENGE EXERCISE
CE 1
Stengel company sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is information relating to Stengel Company’s purchases of WhiteOut snowboards during September. During the same month, 124 WhiteOut snowboards were sold at $160 each. Stengel company uses a periodic inventory system.
Date Explanation Units Unit Cost Total Cost
Sept. 1 Inventory 25 $ 100 $ 2,500
Sept. 12 Purchases 45 106 4,770
Sept. 19 Purchases 24 110 2,640
Sept. 26 Purchases 50 112 5,600
Total 144 $15,510
Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO method. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and LIFO, calculate the sum of inventory and cost of goods sold. What do you notice about the answer you found for each method?
(c) What is gross profit under each method?
(d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a larger amount reported for stockholders’ equity on the balance sheet?

CE 2
Naughty Dog Disc Golf Show uses the lower-of-cost-or market basis for its inventory. The following data are available at December 31
Item Unit Unit Cost Market
Baskets:
Innova 15 $190 $200
Discraft 25 175 160
Disc bags:
Lightning 30 20 16
Wham-o 28 30 28
Instructions
(a) Determine the amount of the ending inventory by applying the lower- of- cost- or-market basis.
(b) When determining “lower of cost or market”, what is “market? Why is defined in this way?

CE 3
Waters Hardware reported cost of the goods sold as follows.
2014 2015
Beginning inventory $ 30,000 $ 40,000
Cost of goods purchased 220,000 245,000
Cost of goods available for sale 250,000 285,000
Ending inventory 40,000 45,000
Cost of goods sold $210,000 $240,000

Waters made two errors: (1) 2014 ending inventory was overstated $5,000, and (2) 2015 ending inventory was understated $8,000
Instructions
(a) Compute the correct cost of goods sold for each year.
(b) What correcting entry would Waters make for error (2)?

CHAPTER 7

FRAUD, INTERNAL CONTROL, AND CASH

CHAPTER LEARNING OBJECTIVES
1. Define fraud and internal control.
2. Identify the principles of internal control.
3. Explain the applications of internal control principles to cash receipts.
4. Explain the applications of internal control principles to cash disbursements
5. Describe the operation of a petty cash fund.
6. Indicate the control features of a bank account.
7. Prepare a bank reconciliation
8. Explain the reporting of cash.

TRUE-FALSE STATEMENTS
1. Internal control is mainly concerned with the amount of authority a supervisor exercises over a subordinate.

2. A highly automated computerized system of accounting eliminates the need for internal control.

3. The safeguarding of assets is an objective of a company’s system of internal control.

4. Management is responsible for establishing a system of internal control.

5. Internal control is most effective when several people are responsible for a given task.

6. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

7. Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

8. The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

9. An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

10. Only large companies need to be concerned with a system of internal control.

11. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

12. In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

13. Firms use physical controls primarily to safeguard their assets.

14. A segregation of duties among employees eliminates the possibility of collusion.

15. For efficiency of operations and better control over cash, a company should maintain only one bank account.

16. Cash registers are an important internal control device used in controlling over-the-counter receipts.

17. Checks received in the mail should be immediately stamped “NSF” to prevent unauthorized cashing of the check.

18. Control over cash disbursements is improved if major expenditures are paid by check.

19. In a voucher system, vouchers are prepared in the accounts receivable department.

20. Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or computer to transfer cash from one location to another.

21. A voucher system is used by many large companies as a means of controlling cash receipts.

22. The petty cash fund eliminates the need for a bank checking account.

23. Cash register overages are deposited in the petty cash fund and cash shortages are made-up from the petty cash fund.

24. A deposit ticket is a negotiable instrument that can be transferred to another party by endorsement.

25. If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company’s record of its checking account balance.

26. Checks from customers who pay their accounts promptly are called outstanding checks.

27. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

28. A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled checks.

29. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

30. Cash which is restricted for a specific use should be separately reported.

31. Internal control consists of the plan of organization and all of the related methods and measures adopted within a business to (a) safeguard its assets, and (b) enhance the accuracy and reliability of its accounting records.

32. In general, documents should be prenumbered and all documents should be accounted for.

33. Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system.

34. Personnel who handle cash receipts should have the option of taking a vacation or not.

35. The duties of approving an item for payment and paying the item should be done by different departments or individuals.

36. The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund.

37. A debit memorandum could show the collection of a note receivable by the bank.

38. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

MULTIPLE CHOICE QUESTIONS
39. Which one of the following is not an objective of a system of internal controls?
a. Safeguard company assets
b. Overstate liabilities in order to be conservative
c. Enhance the accuracy and reliability of accounting records
d. Reduce the risks of errors

40. Internal controls are concerned with
a. only manual systems of accounting.
b. the extent of government regulations.
c. safeguarding assets.
d. preparing income tax returns.

41. Which of the following is not one of the main factors that contribute to fraudulent activity?
a. Opportunity.
b. Incompatible duties.
c. Financial Pressure.
d. Rationalization.

42. Internal control is defined, in part, as a plan that safeguards
a. all balance sheet accounts.
b. assets.
c. liabilities.
d. capital stock.

43. The most important element of the fraud triangle is
a. financial pressure.
b. incompatible duties.
c. opportunity.
d. rationalization.

44. Companies that are subject to, but fail to comply with, the Foreign Corrupt Practices Act of 1977
a. may do so legally by obtaining an exemption.
b. will be automatically dissolved.
c. may be subject to fines and officer imprisonment.
d. may be forced to sell their foreign subsidiaries.

45. Internal controls are not designed to safeguard assets from
a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.

46. Having one person post entries to accounts receivable subsidiary ledger and a different person post to the Accounts Receivable Control account in the general ledger is an example of
a. inadequate internal control.
b. duplication of effort.
c. external verification.
d. segregation of duties.

47. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them
a. increases the potential for errors and fraud.
b. decreases the potential for errors and fraud.
c. is an example of good internal control.
d. is a good example of safeguarding the company’s assets.

48. The custodian of a company asset should
a. have access to the accounting records for that asset.
b. be someone outside the company.
c. not have access to the accounting records for that asset.
d. be an accountant.

49. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.

50. When two or more people get together for the purpose of circumventing prescribed controls, it is called
a. a fraud committee.
b. collusion.
c. a division of duties.
d. bonding of employees.

51. From an internal control standpoint, the asset most susceptible to improper diversion and use is
a. prepaid insurance.
b. cash.
c. buildings.
d. land.

52. The principle of establishing responsibility does not include
a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification.
d. approval of transactions.

53. The control principle related to not having the same person authorize and pay for goods is known as
a. establishment of responsibility.
b. independent internal verification.
c. segregation of duties.
d. rotation of duties.

54. Two individuals at a retail store work the same cash register. You evaluate this situation as
a. a violation of establishment of responsibility.
b. a violation of segregation of duties.
c. supporting the establishment of responsibility.
d. supporting internal independent verification.

55. An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of
a. establishment of responsibility is violated.
b. independent internal verification is violated.
c. documentation procedures is violated.
d. segregation of duties is violated.

56. Controls that enhance the accuracy and reliability of the accounting records are
a. automated controls.
b. external controls.
c. mechanical and electronic controls.
d. physical controls.

57. Related selling activities do not include
a. ordering the merchandise.
b. making a sale.
c. shipping the goods.
d. billing the customer.

58. The independent internal verification principle involves each of the following except the ______________ of data prepared by other employees.
a. comparison
b. reconciliation
c. review
d. segregation

59. Related buying activities include
a. ordering, receiving, paying.
b. ordering, selling, paying.
c. ordering, shipping, billing.
d. selling, shipping, paying.

60. Jolene is warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates
a. documentation procedures are violated.
b. independent internal verification is violated.
c. segregation of duties is violated.
d. establishment of responsibility is violated.

61. Physical controls to safeguard assets do not include
a. cashier department supervisors.
b. vaults.
c. employee identification badges.
d. security guards.

62. In large companies, the independent internal verification procedure is often assigned to
a. computer operators.
b. management.
c. internal auditors.
d. outside CPAs.

63. Maximum benefit from independent internal verification is obtained when
a. it is made on a pre-announced basis.
b. it is done by the employee possessing custody of the asset.
c. discrepancies are reported to management.
d. it is done at the time of the audit.

64. If employees are bonded
a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least 10 years.
c. they have been insured against misappropriation of assets.
d. it is impossible for them to steal from the company.

65. Rebekah Grace has worked for Specoly Inc., for 20 years without taking a vacation. An internal control feature that would address this situation would be
a. other controls.
b. establishment of responsibility.
c. physical controls.
d. documentation procedures.

66. A system of internal control
a. is infallible.
b. can be rendered ineffective by employee collusion.
c. invariably will have costs exceeding benefits.
d. is premised on the concept of absolute assurance.

67. For accounting purposes, postdated checks (checks payable in the future) are considered to be
a. money orders.
b. cash.
c. petty cash.
d. accounts receivable.

68. Postage stamps on hand are considered to be
a. cash.
b. petty cash.
c. cash equivalents.
d. a prepaid expense.

69. Which one of the following items would not be considered cash?
a. Coins
b. Money orders
c. Currency
d. Postdated checks

70. Checks received through the mail should
a. immediately be endorsed “For Deposit Only.”
b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the customer’s account.
c. be cashed at the bank as soon as possible.
d. be “rung up” on a cash register immediately.

71. Proper control for over-the-counter cash receipts includes
a. a cash register with totals visible to the customer.
b. using electronic cash registers with no tapes.
c. cash count sheets requiring only the supervisor’s signature.
d. cash count sheets requiring only the cashier’s signature.

72. A company stamps checks received in the mail with the words “For Deposit Only”. This endorsement is called a(n)
a. blank endorsement.
b. rubber stamp.
c. restrictive endorsement.
d. operational endorsement.

73. The daily cash count of cash register receipts made by department supervisors is an example of
a. other controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.

74. The use of remittance advices for mail receipts is an example of
a. documentation procedures.
b. other controls.
c. physical controls.
d. independent internal verification.

75. Allowing only designated personnel to handle cash receipts is an example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

76. Control over cash disbursements is generally more effective when
a. all bills are paid in cash.
b. disbursements are made by the accounts payable subsidiary clerk.
c. payments are made by check.
d. all purchases are made on credit.

77. Reconciling the bank statement monthly is an example of
a. segregation of duties.
b. independent internal verification.
c. establishment of responsibility.
d. documentation procedures.

78. An exception to disbursements being made by check is acceptable when cash is paid
a. to an owner.
b. to employees as wages.
c. from petty cash.
d. to employees as loans.

79. Allowing only the treasurer to sign checks is an example of
a. documentation procedures.
b. segregation of duties.
c. other controls.
d. establishment of responsibility.

80. Blank checks
a. should be safeguarded.
b. should be pre-signed.
c. do not need to be safeguarded since they must be signed to be valid.
d. should not be prenumbered.

81. An employee authorized to sign checks should not record
a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions.
d. sales transactions.

82. A voucher system is a series of prescribed control procedures
a. to check the credit worthiness of customers.
b. designed to assure that disbursements by check are proper.
c. which eliminates the need for a sales journal.
d. specifically designed for small firms who may not have checking accounts.

83. Under a voucher system, a prenumbered voucher is prepared for every
a. cash receipt, regardless of source.
b. transaction entered into by the business.
c. expenditure except those made from petty cash.
d. journal entry.

84. A credit balance in Cash Over and Short is reported as a(n)
a. asset.
b. liability.
c. miscellaneous expense.
d. miscellaneous revenue.

85. The entry to replenish a petty cash fund includes a credit to
a. Petty Cash.
b. Cash.
c. Freight-in.
d. Postage Expense.

86. A debit balance in Cash Over and Short is reported as a
a. contra asset.
b. miscellaneous asset.
c. miscellaneous expense.
d. miscellaneous revenue.

87. A petty cash fund of $100 is replenished when the fund contains $4 in cash and receipts for $93. The entry to replenish the fund would
a. credit Cash Over and Short for $3.
b. credit Miscellaneous Revenue for $3.
c. debit Cash Over and Short for $3.
d. debit Miscellaneous Expense for $3.

88. A petty cash fund is generally established in order to
a. pay for all merchandise purchased on account.
b. pay employees’ wages.
c. make loans internally to employees.
d. pay relatively small expenditures.

89. A petty cash fund should be replenished
a. every day.
b. at the end of every accounting period.
c. once a year.
d. as soon as an expense is paid from the fund.

90. A petty cash fund should not be used for
a. postage due.
b. loans to the petty cash custodian.
c. taxi fares.
d. customer lunches.

91. The size of the petty cash fund is dependent on
a. the wishes of the custodian of the fund.
b. anticipated disbursements for the year.
c. anticipated disbursements for a three- to four-week period.
d. the size of the regular cash account.

92. Replenishing the petty cash fund requires
a. a debit to Cash.
b. a credit to Petty Cash.
c. a debit to various expense accounts.
d. no accounting entry.

93. Entries are made to the Petty Cash account when
a. establishing the fund.
b. making payments out of the fund.
c. recording shortages in the fund.
d. replenishing the fund.

94. A $100 petty cash fund has cash of $12 and receipts of $85. The journal entry to replenish the account would include a credit to
a. Cash for $88.
b. Petty Cash for $88.
c. Cash Over and Short for $2.
d. Cash for $85.

95. A $100 petty cash fund has cash of $16 and receipts of $82. The journal entry to replenish the account would include a
a. debit to Cash for $82.
b. credit to Petty Cash for $84.
c. debit to Cash Over and Short for $2.
d. credit to Cash for $82.

96. A $100 petty cash fund has cash of $17 and receipts of $86. The journal entry to replenish the account would include a
a. debit to Cash for $86.
b. credit to Petty Cash for $86.
c. credit to Cash Over and Short for $3.
d. credit to Cash for $86.

97. If a petty cash fund is established in the amount of $200, and contains $119 in cash and $84 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts
a. Petty Cash, $84.
b. Petty Cash, $81.
c. Cash, $81; Cash Over and Short, $3.
d. Cash, $84.

98. If a petty cash fund is established in the amount of $250, and contains $153 in cash and $94 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts
a. Petty Cash, $94.
b. Petty Cash, $97.
c. Cash, $94; Cash Over and Short, $3.
d. Cash, $97.

99. All of the following are parties to a check except the
a. bank.
b. Federal Reserve.
c. maker.
d. payee.

100. When opening a bank checking account, a signature card
a. indicates to whom money is to be paid.
b. indicates each person authorized to sign checks on the account.
c. is attached to all pre-printed checks.
d. is required only when dealing with an out-of-state bank.

101. Which one of the following is not necessarily a party to a check?
a. Maker
b. Buyer
c. Payee
d. Payer

102. A bank statement
a. lets a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor’s bank.
c. is a bill from the bank for services rendered.
d. shows the activity which increased or decreased the depositor’s account balance.

103. Which one of the following would not cause a bank to debit a depositor’s account?
a. Bank service charge
b. Collection of a note receivable
c. Wiring of funds to other locations
d. Checks marked NSF

104. A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account which is
a. a contra-asset account.
b. a liability account.
c. also an asset account.
d. a stockholders’ equity account.

105. A remittance advice attached to a company check provides
a. details about the running cash balance in the checking account.
b. the magnetic bank routing numbers.
c. the explanation of the purpose of the check.
d. the signature space for the maker.

106. A deposit made by a company will appear on the bank statement as a
a. debit.
b. credit.
c. debit memorandum.
d. credit memorandum.

107. A check returned by the bank marked “NSF” means
a. no service fee.
b. no signature found.
c. not satisfactorily filled-out.
d. not sufficient funds.

108. A debit memorandum would not be issued by the bank for
a. a bank service charge.
b. the issuance of traveler’s checks.
c. the wiring of funds.
d. the collection of a notes receivable.

109. If the month-end bank statement shows a balance of $54,000, outstanding checks are $15,000, a deposit of $6,000 was in transit at month end, and a check for $900 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is
a. $44,100.
b. $45,000.
c. $45,900.
d. $62,100.

110. In preparing its bank reconciliation for the month of April 2015, Delano, Inc. has available the following information.
Balance per bank statement, 4/30/15 $78,600
NSF check returned with 4/30/15 bank statement 940
Deposits in transit, 4/30/15 10,000
Outstanding checks, 4/30/15 10,400
Bank service charges for April 60
What should be the adjusted cash balance at April 30, 2015?
a. $77,260.
b. $77,600.
c. $78,020.
d. $78,200.

111. The cash account shows a balance of $90,000 before reconciliation. The bank statement does not include a deposit of $5,000 made on the last day of the month. The bank statement shows a collection by the bank of $2,400 and a customer’s check for $640 was returned because it was NSF. A customer’s check for $900 was recorded on the books as $1,080, and a check written for $138 was recorded as $192. The correct balance in the cash account was
a. $91,580.
b. $91,634.
c. $92,400.
d. $96,634.

112. The cash account shows a balance of $40,000 before reconciliation. The bank statement does not include a deposit of $9,200 made on the last day of the month. The bank statement shows a collection by the bank of $3,960 and a customer’s check for $1,300 was returned because it was NSF. A customer’s check for $1,380 was recorded on the books as $1,920, and a check written for $318 was recorded as $390. The correct balance in the cash account was
a. $42,048.
b. $42,192.
c. $43,128.
d. $51,392.

113. If the month-end bank statement shows a balance of $72,000, outstanding checks are $54,000, a deposit of $15,000 was in transit at month end, and a check for $3,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is
a. $33,000.
b. $36,000.
c. $72,000.
d. $114,000.

114. In preparing its bank reconciliation for the month of April 2015, Haskins, Inc. has available the following information.
Balance per bank statement, 4/30/15 $40,920
NSF check returned with 4/30/15 bank statement 1,350
Deposits in transit, 4/30/15 10,500
Outstanding checks, 4/30/15 15,600
Bank service charges for April 60
What should be the adjusted cash balance at April 30, 2015?
a. $34,410.
b. $34,470.
c. $35,760.
d. $35,820.

115. In preparing its August 31, 2015 bank reconciliation, Annie Corp. has available the following information:
Balance per bank statement, 8/31/15 $64,950
Deposit in transit, 8/31/15 11,700
Return of customer’s check not sufficient funds, 8/30/15 1,800
Outstanding checks, 8/31/15 8,250
Bank service charges for August 300
At August 31, 2015, Annie’s adjusted cash balance is
a. $56,700.
b. $56,400.
c. $68,400.
d. $61,500.

116. Trudy, Inc. had the following bank reconciliation at March 31, 2015:
Balance per bank statement, 3/31/15 $37,200
Add: Deposit in transit 6,300
43,500
Less: Outstanding checks 8,600
Balance per books, 3/31/15 $34,900
Data per bank for the month of April 2015 follow:
Deposits $46,700
Disbursements 49,700
All reconciling items at March 31, 2015 cleared the bank in April. Outstanding checks at April 30, 2015 totaled $6,000. There were no deposits in transit at April 30, 2015. What is the cash balance per books at April 30, 2015?
a. $25,900
b. $31,900
c. $34,200
d. $38,500

117. On a bank reconciliation, deposits in transit are
a. added to the bank balance.
b. deducted from the bank balance.
c. added to the book balance.
d. deducted from the book balance.

118. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money.
b. when an employee is suspected of fraud.
c. to explain any difference between the depositor’s balance per books and the balance per bank.
d. by the person who is authorized to sign checks.

119. Deposits in transit
a. have been recorded on the company’s books but not yet by the bank.
b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are checks from customers which have not yet been received by the company.

120. In preparing a bank reconciliation, outstanding checks are
a. added to the balance per bank.
b. deducted from the balance per books.
c. added to the balance per books.
d. deducted from the balance per bank.

121. If a check correctly written and paid by the bank for $427 is incorrectly recorded on the company’s books for $472, the appropriate treatment on the bank reconciliation would be to
a. add $45 to the bank’s balance.
b. add $45 to the book’s balance.
c. deduct $45 from the bank’s balance.
d. deduct $427 from the book’s balance.

122. Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry:
a. Accounts Receivable
Cash
b. Cash
Accounts Receivable
c. Miscellaneous Expense
Accounts Receivable
d. No adjusting entry is necessary.

123. Jukebox Company had checks outstanding totaling $10,800 on its June bank reconciliation. In July, Jukebox Company issued checks totaling $77,800. The July bank statement shows that $76,600 in checks cleared the bank in July. A check from one of Jukebox Company’s customers in the amount of $1,000 was also returned marked “NSF.” The amount of outstanding checks on Jukebox Company’s July bank reconciliation should be
a. $1,200.
b. $11,000.
c. $12,000.
d. $13,000.

124. Each of the following items affect the cash balance per books except
a. bank service charges.
b. notes collected by the bank.
c. NSF checks.
d. outstanding checks.

125. Electric Sunset Company gathered the following reconciling information in preparing its July bank reconciliation:
Cash balance per books, 7/31 $22,000
Deposits in transit 1,200
Notes receivable and interest collected by bank 4,400
Bank charge for check printing 80
Outstanding checks 8,000
NSF check 680
The adjusted cash balance per books on July 31 is
a. $17,640.
b. $18,840.
c. $25,640.
d. $26,840.

126. Unicycle Company developed the following reconciling information in preparing its September bank reconciliation:
Cash balance per bank, 9/30 $24,000
Note receivable collected by bank 12,000
Outstanding checks 14,000
Deposits in transit 7,000
Bank service charge 150
NSF check 2,400

MC. 126 (Cont.)
Determine the cash balance per books (before adjustments) for Unicycle Company.
a. $2,450.
b. $7,550.
c. $9,550.
d. $17,000.

127. Bank errors
a. occur because of time lags.
b. must be corrected by debits.
c. are infrequent in occurrence.
d. are corrected by making an adjusting entry on the depositor’s books.

128. An adjusting entry is not required for
a. outstanding checks.
b. collection of a note by the bank.
c. NSF checks.
d. bank service charges.

129. Winter Gloves Company had checks outstanding totaling $12,800 on its May bank reconciliation. In June, Winter Gloves Company issued checks totaling $79,800. The July bank statement shows that $71,400 in checks cleared the bank in July. A check from one of Winter Gloves Company’s customers in the amount of $2,000 was also returned marked “NSF.” The amount of outstanding checks on Winter Gloves Company’s July bank reconciliation should be
a. $8,400.
b. $19,200.
c. $21,200.
d. $23,200.

130. Candy Claws Company gathered the following reconciling information in preparing its August bank reconciliation:
Cash balance per books, 8/31 $19,500
Deposits in transit 900
Notes receivable and interest collected by bank 4,800
Bank charge for check printing 120
Outstanding checks 12,000
NSF check 1,020
The adjusted cash balance per books on August 31 is
a. $11,160.
b. $12,060.

MC. 130 (Cont.)
c. $23,160.
d. $24,060.

131. Shane Company gathered the following reconciling information in preparing its April bank reconciliation:
Cash balance per books, 4/30 $19,800
Deposits in transit 2,700
Notes receivable and interest collected by bank 6,600
Bank charge for check printing 150
Outstanding checks 13,500
NSF check 1,260
The adjusted cash balance per books on April 30 is
a. $12,930.
b. $14,190.
c. $23,730.
d. $24,990.

132. Bacher Company developed the following reconciling information in preparing its September bank reconciliation:
Cash balance per bank, 9/30 $6,160
Note receivable collected by bank 3,360
Outstanding checks 3,200
Deposits in transit 2,520
Bank service charge 42
NSF check 672
Using the above information, determine the cash balance per books (before adjustments) for the Bacher Company.
a. $2,834
b. $5,480
c. $8,148
d. $8,828

133. In the month of November, Kinsey Company Inc. wrote checks in the amount of $18,500. In December, checks in the amount of $25,316 were written. In November, $16,936 of these checks were presented to the bank for payment, and $21,766 were presented in December. What is the amount of outstanding checks at the end of November?
a. $1,564
b. $4,830
c. $5,114
d. $6,816

134. In the month of November, Kinsey Company Inc. wrote checks in the amount of $27,750. In December, checks in the amount of $37,974 were written. In November, $25,404 of these checks were presented to the bank for payment, and $32,649 were presented in December. What is the amount of outstanding checks at the end of December?
a. $2,346
b. $7,245
c. $7,671
d. $10,224

135. At April 30, Yaddof Company has the following bank information: cash balance per bank $2,300; outstanding checks $390; deposits in transit $275; credit memo for interest $50; bank service charge $10. What is Mareska’s adjusted cash balance on April 30?
a. $2,185
b. $2,245
c. $2,300
d. $2,340

136. At June 30, Yaddof Company has the following bank information: cash balance per bank $1,800; outstanding checks $340; deposits in transit $275; credit memo for interest $75; bank service charge $10. What is Mareska’s adjusted cash balance on June 30?
a. $1,735
b. $1,800
c. $1,810
d. $1,865

137. Hoppmann Company wrote checks totaling $25,620 during October and $27,975 during November. $24,360 of these checks cleared the bank in October, and $27,330 cleared the bank in November. What was the amount of outstanding checks on November 30?
a. $645
b. $1,260
c. $1,905
d. $2,355

138. Fitzgerald Company wrote checks totaling $34,160 during October and $37,300 during November. $32,480 of these checks cleared the bank in October, and $36,440 cleared the bank in November. What was the amount of outstanding checks on November 30?
a. $2,860
b. $1,680
c. $2,540
d. $3,140

139. Carothers Company assembled the following information in completing its March bank reconciliation: balance per bank $7,640; outstanding checks $1,550; deposits in transit $2,500; NSF check $160; bank service charge $50; cash balance per books $8,800. As a result of this reconciliation, Carothers will
a. reduce its cash account by $50.
b. reduce its cash account by $210.
c. reduce its cash account by $950.
d. increase its cash account by $110.

140. Macrinez Company assembled the following information in completing its July bank reconciliation: balance per bank $22,920; outstanding checks $4,650; deposits in transit $7,500; NSF check $480; bank service charge $150; cash balance per books $26,400. As a result of this reconciliation, Macrinez will
a. reduce its cash account by $150.
b. reduce its cash account by $630.
c. reduce its cash account by $2,850.
d. increase its cash account by $330.

141. If a check correctly written and paid by the bank for $584 is incorrectly recorded on the company’s books for $548, the appropriate treatment on the bank reconciliation would be to
a. deduct $36 from the book’s balance.
b. add $36 to the book’s balance.
c. deduct $36 from the bank’s balance.
d. deduct $584 from the book’s balance.

142. In the month of May, Kijak Company Inc. wrote checks in the amount of $84,000. In June, checks in the amount of $114,000 were written. In May, $75,000 of these checks were presented to the bank for payment, and $99,000 in June. What is the amount of outstanding checks at the end of May?
a. $9,000
b. $15,000
c. $24,000
d. $30,000

143. In the month of May, Kijak Company Inc. wrote checks in the amount of $56,000. In June, checks in the amount of $76,000 were written. In May, $50,000 of these checks were presented to the bank for payment, and $66,000 in June. What is the amount of outstanding checks at the end of June?
a. $6,000
b. $10,000
c. $16,000
d. $20,000

144. Cash equivalents could include each of the following except
a. bank certificates of deposit.
b. money market funds.
c. petty cash.
d. U.S. Treasury bills.

145. Which of the following would not be reported on the balance sheet as a cash equivalent?
a. Money market fund
b. Sixty-day certificate of deposit
c. Six-month Treasury bill
d. Money market savings certificate

146. Compensating balances are a restriction on the use of a company’s cash and should be
a. reported as a current asset.
b. reported as a noncurrent asset.
c. disclosed in the financial statements.
d. reported as a reduction of cash.

147. The principles of internal control include all of the following except
a. establishment of responsibility.
b. combining of duties.
c. physical, mechanical, and electronic controls.
d. independent internal verification.

148. An example of poor internal control is
a. The accountant should not have physical custody of the asset nor access to it.
b. The custodian of an asset should not maintain or have access to the accounting records.
c. One person should be responsible for handling related transactions.
d. A salesperson makes the sale, and a different person ships the goods.

149. Having different individuals receive cash, record cash receipts, and hold the cash is an example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

150. Storing cash in a company safe is an application of which internal control principle?
a. Segregation of duties
b. Documentation procedures
c. Physical controls
d. Establishment of responsibility

151. Using prenumbered checks and having an approved invoice for each check is an example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

152. An application of good internal control over cash disbursements is
a. following payment, the approved invoice should be stamped PAID.
b. blank checks should be stored in the treasurer’s desk.
c. each check should be compared with the approved invoice after the check is issued.
d. check signers should record the cash disbursements.

153. When making a payment from the petty cash fund for postage stamps, the following journal entry is made.
a. Supplies XXXX
Petty Cash XXXX
b. Postage Expense XXXX
Petty Cash XXXX
c. Miscellaneous Expense XXXX
Petty Cash XXXX
d. No entry is made.

154. All of the following would involve a debit memorandum except
a. a bank service charge.
b. an NSF check.
c. the cost of printing checks.
d. interest earned.

155. A bank may issue a credit memorandum for
a. a bank service charge.
b. an NSF (not sufficient funds) check from a customer.
c. the collection of a note receivable for the depositor by the bank.
d. the cost of printing checks.

156. Journal entries are required by the depositor for all of the following except
a. collection of a note receivable.
b. bank errors.
c. bank service charges.
d. an NSF check.

157. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of
a. 1 month or less when purchased.
b. 3 months or less when purchased.
c. 6 months or less when purchased.
d. 1 year or less when purchased.

158. The principles of internal control activities are used in the
a. U.S. but not globally.
b. internationally but not in the U.S.
c. in the U.S. and Canada but not globally.
d. globally.

159. Sarbanes Oxley applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.

160. The fraud triangle applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.

161. What percentage of companies worldwide have experienced fraud in a recent two-year period?
a. 1%
b. 10%
c. 50%
d. 100%

162. Tangible frauds include
a. asset misappropriation.
b. false pretenses.
c. counterfeiting.
d. all of the above.

163. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosures requirements.

164. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosures requirements.

165. GAAP’s accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are:
Accounting and internal control procedures Definition of cash equivalents
a. essentially similar essentially similar
b. essentially different essentially similar
c. essentially similar essentially different
d. essentially different essentially different

166. Cash is defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. cash on hand, demand deposits, and highly liquid investments.

167. Cash equivalents are defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. short-term, highly liquid investments that are readily convertible into known amounts of cash.

BRIEF EXERCISES

BE 168
Match the principle of internal control to each of the following cases.

a) Establishment of responsibility
b) Segregation of duties
c) Accountability for assets
d) Documentation procedures
e) Physical controls

1. Cash is locked in a safe overnight.
2. Employees who receive shipments of goods do not have access to the accounting records for merchandise.
3. Shipping documents are prenumbered.
4. The bookkeeper does not have physical custody of assets.
5. Only the treasurer of the company can sign checks.

BE 169
Identify which principle of internal control is being followed in each of the following cases.
1. Warehouse employees do not have access to the accounting records.
2. Prenumbered shipping documents are prepared for each shipment of goods.
3. The locked warehouse is accessible only by warehouse employees with keys.

BE 170
Identify the internal control procedures applicable to cash receipts for Ferguson Company in each of the following cases.
1. All cashiers are bonded.
2. The treasurer compares the total cash receipts to the bank deposit daily.
3. The bookkeeper records cash receipts which are held by the treasurer.
4. Only the treasurer holds cash receipts.
5. Deposit slips are completed for each deposit.

BE 171
Identify the internal control procedures applicable to cash disbursements followed by Downey Company in each of the following cases.
1. Company checks are prenumbered.
2. Only the treasurer is authorized to sign checks.
3. All employees are required to take vacations.
4. Blank checks are stored in a locked safe.
5. The bookkeeper, not the treasurer, records cash disbursements.

BE 172
On October 1, Head and Heart Company’s petty cash fund of $150 is replenished. The fund contains cash of $30, and receipts for supplies of $75 and postage of $45. Prepare the journal entry to record the replenishment of the petty cash fund.

BE 173
Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation.
1. EFT transfer to a supplier
2. Bank service charge
3. Check printing charge
4. Error recording check # 214 which was written for $450 but recorded for $540
5. Collection of note and interest by bank on company’s behalf

BE 174
Identify whether each of the following items would be (a) added to the book balance, (b) deducted from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted from the bank balance.
1. Deposits in transit
2. Bank service charge
3. Collection of note and interest by bank on company’s behalf
4. NSF check
5. Outstanding checks

BE 175
Identify which of the following reconciling items would require an adjusting entry to be made by Danielle Doyle Company.
1. Deposits in transit totaled $2,000.
2. A check written to the company for $415 by Cartography Company was returned NSF.
3. The bank charged the company $25 for printing checks.
4. Outstanding checks totaled $3,300
5. A debit memorandum reported an EFT of $178 to Salome Utilities

BE 176
Harnish Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case.
1. A check for $127 written to the company by J. Chandler was returned NSF.
2. The monthly service charge by the bank was $20.
3. The bank collected a $1,000 note plus interest of $100 on the company’s behalf. The company had not accrued the interest.

BE 177
The following reconciling items are applicable to the bank reconciliation for the Spahn Company. Indicate how each item should be shown on a bank reconciliation.

a. Outstanding checks.
b. Bank credit memorandum for collecting a note for the depositor.
c. Bank debit memorandum for service charge.
d. Deposit in transit.

BE 178
At August 31, Coffman Company has this bank information: cash balance per bank $6,450; outstanding checks $2,762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2015.

BE 179
Given the following information, determine the adjusted cash balance per books from the following information:
a. Balance per books as of June 30, $8,600.
b. Outstanding checks, $820.
c. NSF check returned with bank statement, $130.
d. Deposit mailed the afternoon of June 30, $300.
e. Check printing charges, $30.
f. Interest earned on checking account, $12.

EXERCISES
Ex. 180
Match each of the following principles of internal control with the appropriate description below.
A. Establishment of responsibility B. Segregation of duties C. Documentation procedures D. Physical controls E. Independent internal verification F. Human resource controls
_____ 1. Involves the review, comparison, and reconciliation of data prepared by other employees.
_____ 2. Provide evidence that transactions and events have occurred.
_____ 3. Includes the authorization and approval of transactions.
_____ 4. Rotating employees’ duties and requiring employees to take vacations.
_____ 5. Related activities should be assigned to different individuals.
_____ 6. Using garment sensors to deter theft.

Ex. 181
Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described.
Internal Control Principles
A. Establishment of responsibility
B. Segregation of duties
C. Physical controls
D. Documentation procedures
E. Independent internal verification
F. Human resource controls
1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
2. Three people handle cash sales from the same cash register drawer.
3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.
4. The person who is authorized to sign checks approves purchase orders for payment.
5. Some cash payments are not recorded because checks are not prenumbered.
6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
7. The treasurer of the company has not taken a vacation for over 20 years.

Ex. 182
Joe Foss has worked for Dr. Sam Milton for several years. Joe demonstrates a loyalty that is rare among employees. He hasn’t taken a vacation in the last three years. One of Joe’s primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Joe doesn’t bother with giving each patient a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office, Joe offers to help Ann post the payments to the patients’ accounts receivable. She is always happy to receive his help, because he is a very conscientious worker.

Ex. 182 (Cont.)

Instructions
Identify any principles of internal control that may be violated in this medical office situation.

Ex. 183
Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write “None.” If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems
1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.
2. A small fire destroys 3 days of cash receipts.
3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection.
4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.
5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand.
6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor.
7. Cashiers with over 5 years’ experience are not bonded.

Ex. 183 (Cont.)
Internal Control Principles
a. Establishment of responsibility
b. Segregation of duties
c. Physical controls
d. Documentation procedures
e. Independent internal verification
f. Human resource controls

Ex. 184
Match the internal control principle below with the appropriate cash receipts procedure described.
a. Documentation procedures b. Establishment of responsibility c. Independent internal verification d. Human resource controls e. Physical controls f. Segregation of duties
_____ 1. Only designated personnel are authorized to handle cash receipts.
_____ 2. Different individuals receive cash and record cash receipts.
_____ 3. Use remittance advice and cash register tapes.
_____ 4. Store cash in safes and bank vaults.
_____ 5. Treasurer compares total receipts to bank deposits daily.
_____ 6. Bonding of employees that handle cash.

Ex. 185
Match the internal control principle below with the appropriate cash disbursements procedure described.
a. Establishment of responsibility b. Segregation of duties c. Documentation procedures d. Physical controls e. Independent internal verification f. Human resource controls
_____ 1. Compare checks to invoices.
_____ 2. Different individuals approve and make payments.
_____ 3. Print check amounts by machine with indelible ink.
_____ 4. Only designated personnel are authorized to sign checks.
_____ 5. Each check must have approved invoice.
_____ 6. Requiring employees to take vacations.

Ex. 186
The petty cash fund of $200 for Ginther Company appeared as follows on December 31, 2015:

Cash $61.60
Petty cash vouchers
Freight in $27.40
Postage 45.00
Balloons for a special occasion 63.00

Instructions
1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain.
2. Prepare in general journal form the entry to replenish the fund.
3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry.

Ex. 187
Prepare the entry to replenish the $200 petty cash fund of Erin Company, assuming the fund has receipts for: freight-out $60, postage $105, and miscellaneous expense $25. The fund contains $8 in cash.

Ex. 188
On October 1, 2015, Ellington Company establishes an imprest petty cash fund by issuing a check for $200 to Erin Angelo, the custodian of the petty cash fund. On October 31, 2015, Erin Angelo submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $32 cash in the fund:
Freight-In $28
Supplies Expense 42
Entertainment of Clients 65
Postage Expense 30
Instructions
Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31.

Ex. 189
Ernest Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $200. During March the following petty cash receipts were found in the petty cash box.

Receipt
Date No. For Amount
3/5 1 Stamp Inventory $74
7 2 Freight-Out 42
9 3 Miscellaneous Expense 22
11 4 Travel Expense 49

The fund was replenished on March 15 when the fund contained $9 in cash. On March 20, the amount in the fund was increased to $300.

Instructions
Journalize the entries in March that pertain to the operation of the petty cash fund.

Ex. 190
Sky Company is unable to reconcile the bank balance at January 31. Sky’s reconciliation is as follows.

Cash balance per bank $5,300
Add: NSF check 1,570
Less: Bank service charge 35
Adjusted balance per bank $6,835
Cash balance per books $5,705
Less: Deposits in transit 750
Add: Outstanding checks 1,950
Adjusted balance per books $6,905
Instructions
(a) Prepare a correct bank reconciliation.
(b) Journalize the entries required by the reconciliation.

Ex. 191
On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $820, and no. 357, $615. The May bank statement and the May cash payments journal show the following.

Bank Statement Cash Payments Journal
Checks Paid Checks Issued
Date Check No. Amount Date Check No. Amount
5/4 354 650 5/2 358 159
5/2 355 820 5/5 359 275
5/17 358 159 5/10 360 890
5/12 359 275 5/15 361 850
5/20 360 890 5/22 362 750
5/29 363 480 5/24 363 480
5/30 362 750 5/29 364 870
Ex. 191 (Cont.)
Instructions
Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.

Ex. 192
The information below relates to the Cash account in the ledger of Lee Company.

Balance September 1—$25,725; Cash deposited—$96,000.
Balance September 30—$22,225; Checks written—$99,500.

The September bank statement shows a balance of $24,635 on September 30 and the following memoranda.

Credits Debits
Collection of $4,250 note plus interest $50 $4,300 NSF check: J. E. Hoover $735
Interest earned on checking account $40 Safety deposit box rent $75

At September 30, deposits in transit were $4,695, and outstanding checks totaled $3,575.

Instructions
Prepare the bank reconciliation at September 30.

Ex. 193
The cash records of Jasmin Company show the following four situations.

1. The June 30 bank reconciliation indicated that deposits in transit total $2,110. During July the general ledger account Cash shows deposits of $23,620, but the bank statement indicates that only $23,400 in deposits were received during the month.

2. The June 30 bank reconciliation also reported outstanding checks of $1,250. During the month of July, Jasmin Company books show that $25,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July.

3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $2,900.

4. In September, cash disbursements per books were $36,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $3,200.

There were no bank debit or credit memoranda. No errors were made by either the bank or Jasmin Company.

Instructions
Answer the following questions.

(a) In situation (1), what were the deposits in transit at July 31?
(b) In situation (2), what were the outstanding checks at July 31?
(c) In situation (3), what were the deposits in transit at August 31?
(d) In situation (4), what were the outstanding checks at August 31?

Ex. 194
Lyleen Boat Company’s bank statement for the month of September showed a balance per bank of $7,000. The company’s Cash account in the general ledger had a balance of $5,459 at September 30. Other information is as follows:
(1) Cash receipts for September 30 recorded on the company’s books were $5,700 but this amount does not appear on the bank statement.
(2) The bank statement shows a debit memorandum for $40 for check printing charges.
(3) Check No. 119 payable to Mann Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Mann Company and that the payment to them should have been for $284.
(4) The total amount of checks still outstanding at September 30 amounted to $5,000.
(5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490.
(6) The bank returned an NSF check from a customer for $360.
(7) The bank included a credit memorandum for $2,560 which represents collection of a customer’s note by the bank for the company; principal amount of the note was $2,500 and interest was $60. Interest has not been accrued.

Instructions
(a) Prepare a bank reconciliation for Lyleen Boat Company at September 30.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Ex. 195
Bell Food Store developed the following information in recording its bank statement for the month of March.
Balance per books March 31 $ 3,664
Balance per bank statement March 31 $10,900
———————————————————————————————————————————
(1) Checks written in March but still outstanding $7,000.
(2) Checks written in February but still outstanding $3,100.
(3) Deposits of March 30 and 31 not yet recorded by bank $5,200.
(4) NSF check of customer returned by bank $1,200.
(5) Check No. 210 for $593 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $539.
Ex. 195 (Cont.)
(6) Bank service charge for March was $50.
(7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in March.
(8) The bank collected a note receivable for the company for $3,000 plus $100 interest revenue.

Instructions
Prepare a bank reconciliation at March 31.

Ex. 196
Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation

Items:
1. Outstanding checks.

2. Bank service charge.

3. Check for $420 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $240.

4. Deposit in transit.

5. Bank returns deposited check marked NSF.
Ex. 196 (Cont.)

6. Bank collects notes receivable and interest for depositor.

7. Bank debit memorandum for check printing fees.

8. Petty cash custodian has $91 in paid petty cash vouchers that have not been reimbursed.

9. Bank charged a check against the company which should have been charged to another company.

10. A check for $246 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $264.

Ex. 197
The following adjusting entries for Donkey Company were prepared after completing a bank reconciliation. For each of the following adjustments, prepare a probable explanation for the adjusting entry.

1. Supplies 180
Cash 180

2. Accounts Receivable—B. Borke 460
Cash 460

3. Cash 2,240
Notes Receivable 2,000
Interest Revenue 240

4. Sales 72
Cash 72

5. Miscellaneous Expense 18
Cash 18

Ex. 198
The cash balance per books for Feagen Company on September 30, 2015 is $10,740.93. The following checks and receipts were recorded for the month of October, 2015:

Checks Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $843.86 10/ 5
18 $780.62 23 $1,687.50 $941.54 10/21
19 $157.00 24 $ 921.30 $808.58 10/27
20 $587.50 25 $ 246.03 $967.00 10/30
21 $234.15

In addition, the bank statement for the month of October is presented below:
Balance Deposits and Credits Checks and Debits Balance
Last Statement No. Total Amount No. Total Amount This Statement
————————————————————————————————————————
$5,404.84 5 $9,178.36 10 $3,632.19 $10,951.01
————————————————————————————————————————
Checks and other debits Deposits Date Balance
———————————————————————
No. Amount No. Amount No. Amount
————————————————————————————————————————
14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31
18 708.62 24 921.30 843.86 10/ 8 $9,219.03
19 157.00 25 246.03 941.54 10/23 $9,541.58
21 234.15 25.00 SC 808.58 10/29 $10,101.01
240.00 NSF 1,100.00 CM 10/31 $10,951.01
————————————————————————————————————————
Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)
————————————————————————————————————————

Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Long, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 which has not been accrued. The bank service charge is $25.00.

Ex. 198 (Cont.)
Instructions
(a) Prepare a bank reconciliation at October 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.

Ex. 199
Riley Company received a notice with its bank statement that the bank had collected a note receivable for $5,000 plus $150 of interest. The bank had credited these amounts to Riley ‘s account less a collection fee of $10. Riley Company had already accrued the interest for this note on its books.
(a) How will these items affect Riley Company’s bank reconciliation?
(b) Prepare the journal entry that Riley Company will make to record this information on its books.

Ex. 200
The cash records of Mercury Company show the following:
1. The June 30 bank reconciliation indicated that deposits in transit totaled $790. During July the general ledger account Cash shows deposits of $9,800, but the bank statement indicates that only $8,240 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $1,200. During the month of July, Mercury Company books show that $11,570 of checks were issued, yet the bank statement showed that $11,100 of checks cleared the bank in July.

There were no bank debit or credit memoranda and no errors were made by either the bank or Mercury Company.

Answer the following questions:
(a) What were the deposits in transit at July 31?
(b) What were the outstanding checks at July 31?

Ex. 201
Indicate how each of the following items would be shown on a bank reconciliation.
1. Bank error (The bank charged our account with another company’s check)
2. Check printing charge
3. Deposits in transit
4. Note collected by the bank
5. NSF checks
6. Outstanding checks

Ex. 202
The cash records of Barry Company show the following:
1. In September, deposits per the bank statement totaled $38,600; deposits per books $39,000; and deposits in transit at September 30 were $4,600.
2. In September, cash disbursements per books were $36,500; checks clearing the bank were $39,800; and outstanding checks at September 30 were $3,100.

There were no bank debit or credit memoranda and no errors were made by either the bank or Barry Company.

Answer the following questions:
(a) What were the deposits in transit at August 31?
(b) What were the outstanding checks at August 31?

Ex. 203
Listed below are items that may be useful in preparing the March 2015, bank reconciliation for Walker Machine Works.

Using the following code, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.
Code Located or Treated
A Add to the cash balance per books
B Deduct from the cash balance per books
C Add to the cash balance per bank
D Deduct from the cash balance per bank
E Does not affect the bank reconciliation
1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped “account closed.”
2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account.
3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works.
4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance.
5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.
6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.
7. The bank statement included a credit memorandum dated March 28, 2015, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.

Ex. 203 (Cont.)
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.
9. On March 24, 2015, Walker Machine Works delivered to the bank for collection a $2,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2015, indicated the collection of the note and $90.00 of interest.
10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest.

Ex. 204
The following information was used to prepare the March 2015, bank reconciliation for Walker Machine Works. Identify the items that require adjustment to the cash balance per books and prepare the appropriate adjusting entries.
1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped “NSF.”
2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account.
3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works.
4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance.
5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.
6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.
7. The bank statement included a credit memorandum dated March 28, 2015, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.
9. On March 24, 2015, Walker Machine Works delivered to the bank for collection a $4,500,
3-month note from Don Decker. A credit memorandum dated March 29, 2015, indicated the collection of the note and $90.00 of interest.
10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest.

Ex. 205
Compute Whiz Company’s adjusted cash balance per books based on the following information:
Ending cash balance per books $4,200 Deposit in transit 900 Check printing charge 20 Note collected by bank for Whiz 1,600

COMPLETION STATEMENTS
206. Internal control consists of the related methods and measures adopted to ____________ its assets and enhance the ______________ and ______________ of its accounting records.

207. The three main factors that contribute to fraudulent activity are depicted by the _______________.

208. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________.

209. The ______________ of an asset should not have access to the accounting records of that asset.

210. Employees of a company who evaluate the effectiveness of the company’s system of internal controls on a year-round basis are called ______________.

211. Using _______________ documents is a control measure which helps in accounting for all documents in a series and also prevents a document from being recorded more than once.

212. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees.

213. Two limitations of systems of internal control are the concept of ______________ and the ______________.

214. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________.

215. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________.

216. A voucher is recorded in the ________________ and filed according to the date on which it is to be paid.

217. A __________________ fund is used to pay relatively small expenditures.

218. A debit memorandum issued by the bank ______________ the cash balance in the depositor’s account.

219. There are three parties to a check: (1)_______________, (2)______________, and the (3)______________.

220. The difference between the cash in bank balance shown on the company’s books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party.

221. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________.

222. A check correctly written for $270 was incorrectly entered in the cash payments journal for $720. In preparing a bank reconciliation, $_____________ must be ______________ the cash balance per ______________.

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

A. Prenumbered documents G. Bank signature card
B. Custody of an asset should be kept H. Payee
separate from the record-keeping I. Maker
for that asset J. Canceled checks
C. Cash registers, garment sensors K. NSF checks
and burglar alarms are examples L. Outstanding checks
D. Bonding employees M. Petty cash receipt
E. Collusion N. Cash equivalents
F. Cash O. Voucher system

1. Segregation of duties.
2. One to whom a check is payable.
3. Two or more employees circumventing prescribed procedures.
4. Prevent a transaction from being recorded more than once.
5. Checks which have been returned by the maker’s bank for lack of funds.
6. Checks which have been paid by the depositor’s bank.
7. Indicates those people authorized to sign checks.
8. Anything that a bank will accept for deposit.
9. Mechanical and electronic control devices.
10. One who issues a check.
11. Insurance protection against misappropriation of assets.
12. An extensive network of approvals by authorized individuals.
13. Document indicating the purpose of a petty cash expenditure.
14. Issued checks that have not been paid by the bank.
15. Highly liquid investments.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 224
Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each.

S-A E 225
Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business, affect the implementation of a system of internal controls.

S-A E 226
Your friend, Dean, has opened a movie theater. Dean states that he does not have time to develop and implement a system of internal controls.
a. Provide Dean with the objectives of a system of internal controls.
b. Explain to Dean why he should develop a system of internal controls.

S-A E 227
(a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity. (b) When are journal entries required in the operation of a petty cash fund?

S-A E 228
The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank.

S-A E 229 (Ethics)
Moyer Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company’s management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them.

Required:
“Internal controls exist because most people can’t be trusted.” Is this true? Explain.

S-A E 230 (Communication)
Medaid is a medical office management franchise. There are currently twenty-five medical offices managed by a Medaid franchisee. One of the services provided to franchisees is assistance in training various staff members.

Medaid is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls.

Required:
Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee.

CHALLENGE EXERCISE
CE 1
Williams Company established a petty cash fund on May 1, cashing a check for $250. The company reimbursed the fund on June 1 with the following results.
June 1: Cash in fund $64. Receipts: delivery expense $81; postage expense $39; and miscellaneous expense $62.

July 1: Cash in funds $43 Receipts: delivery expense $91.00; entertainment expense $71.00; and miscellaneous expense $45

On July 10, Williams increased the fund form $250 to $400.

Instructions
(a) Prepare journal entries for Williams Company for May 1, June 1, July 1, and July 10.
(b) What internal control features are present in the petty cash fund?

CE 2
The following information pertains to Manning Video Company.
1. Cash balance per bank, July 31, $8,363.
2. July bank service charge not recorded by the depositor $22.
3. The bank erroneously charged another company’s $700 check against Manning’s account.
4. Cash balance per books, July 31, $9,784.
5. The bank charged Manning’s account $350 for a customer’s NSF check.
6. Deposits in transit, July 31, $2,700.
7. Manning recorded a cash receipt from a customer as $32. The bank correctly recorded it at $23
8. Bank collected a $1,750 note for Manning in July, plus interest $36. less fee $20.The collection has not been recorded by Manning and no interest has been accrued.
9. Outstanding check, July 31, $594.

Instructions
(a) Prepare a bank reconciliation at July 31.
(b) Journalize the adjusting entries at July 31 on the books of Manning Video Company.

CE 3
Newton Company has recorded the following items in its financial records.

Cash in bank:
Checking account $32,000
Money market fund 13,000
Payroll account 3,000
Certificate of deposit (matures in 2 months) 5,000
Certificate of deposit (matures in 12 months) 10,000 $ 63,000
Cash in plant expansion fund 120,000
Cash on hand 11,000
Highly liquid investments 35,000
Petty Cash 300
Receivable from customers 99,000
Stock investment 61,000
U.S. Treasury bills 20,000

The checking account is subject to a compensating balance of $5,000. The highly liquid investments had maturities of 3 months or less when they were purchased. The stock investment will be sold in the next 6 to 12 months. The plant expansion project will begin in 3 years.

Instructions

(a) What amount should Newton report as “Cash and cash equivalents” on its balance sheet?
(b) Where should the items not included in part (a) be reported on the balance sheet?

CHAPTER 8

ACCOUNTING FOR RECEIVABLES

CHAPTER LEARNING OBJECTIVES
1. Identify the different types of receivables.
2. Explain how companies recognize accounts receivable.
3. Distinguish between the methods and bases companies use to value accounts receivable.
4. Describe the entries to record the disposition of accounts receivable.
5. Compute the maturity date of and interest on notes receivable.
6. Explain how companies recognize notes receivable.
7. Describe how companies value notes receivable.
8. Describe the entries to record the disposition of notes receivable
9. Explain the statement presentation and analysis of receivables.

TRUE-FALSE STATEMENTS
1. Trade receivables occur when two companies trade or exchange notes receivables.

2. Other receivables include nontrade receivables such as loans to company officers.

3. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

4. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.

5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing.

6. Accounts receivable are the result of cash and credit sales.

7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivable is debited for the amount of the interest.

8. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.

9. The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships.

10. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.

11. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

12. Allowance for Doubtful Accounts is a contra asset account.

13. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

14. Generally accepted accounting principles require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes.

15. Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off.

16. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

17. The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debt Expense being recognized than the percentage of receivables basis.

18. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.

19. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

20. Sales resulting from the use of Visa and MasterCard are considered credit sales by the retailer.

21. A factor purchases receivables from businesses for a fee and collects the remittances directly from customers.

22. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.

23. Receivables may be sold because they may be the only reasonable source of cash.

24. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

25. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

26. The maturity date of a 1-month note receivable dated June 30 is July 30.

27. The two key parties to a note are the maker and the payee.

28. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

29. The accounts receivable turnover is computed by dividing total sales by the average net receivables during the year.

30. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements.

31. Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt.

32. The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables.

33. The account Allowance for Doubtful Accounts is closed out at the end of the year.

34. In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash.

35. When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted.

36. A note is dishonored when it is not fully paid at maturity.

37. Short-term receivables are reported in the current assets section before temporary investments.

MULTIPLE CHOICE QUESTIONS
38. Claims for which formal instruments of credit are issued as proof of the debt are
a. accounts receivable.
b. interest receivable.
c. notes receivable.
d. other receivables.

39. Interest is usually associated with
a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.

40. The receivable that is usually evidenced by a formal instrument of credit is a(n)
a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.

41. Which of the following receivables would not be classified as an “other receivable”?
a. Advance to an employee
b. Refundable income tax
c. Notes receivable
d. Interest receivable

42. Notes or accounts receivables that result from sales transactions are often called
a. sales receivables.
b. non-trade receivables.
c. trade receivables.
d. merchandise receivables.

43. The term “receivables” refers to
a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies.
c. cash to be paid to creditors.
d. cash to be paid to debtors.

44. A cash discount is usually granted to all of the following except
a. retail customers.
b. retailers.
c. wholesalers.
d. All of these answers are correct.

45. Which one of the following is not a primary problem associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable

46. Trade accounts receivable are valued and reported on the balance sheet
a. in the investment section.
b. at gross amounts less sales returns and allowances.
c. at net realizable value.
d. only if they are not past due.

47. Three accounting issues associated with accounts receivable are
a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and disposing.
d. accrual, bad debts, and disposing.

48. Which of the following would require a compound journal entry?
a. To record merchandise returned that was previously purchased on account.
b. To record sales on account.
c. To record purchases of inventory when a discount is offered for prompt payment.
d. To record collection of accounts receivable when a cash discount is taken.

49. Which of the following would be considered as an unlikely occurrence?
a. Manufacturer offers a cash discount to a wholesaler.
b. Wholesaler offers a cash discount to a retailer.
c. Retailer offers a cash discount to a customer.
d. All of these answers are correct.

50. A customer charges a treadmill at Annie’s Sport Shop. The price is $4,000 and the financing charge is 6% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer’s account.
What is the amount of the finance charge?
a. $8
b. $20
c. $80
d. $240

51. A customer charges a treadmill at Annie’s Sport Shop. The price is $4,000 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer’s account.
The accounts affected by the journal entry made by Annie’s Sport Shop to record the finance charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue

52. Which of the following practices by a credit card company results in lower interest charges to the cardholder?
a. The card company states interest as a monthly percentage rather than an annual percentage.
b. The card company allows a grace period before interest is accrued.
c. The card company allows cardholders to skip payments on their cards.
d. The card company calculates finance charges from the date of purchase to the date the amount is paid.

53. If a department store fails to make the entry to accrue the finance charges due from customers,
a. accounts receivable will be overstated.
b. interest revenue will be understated.
c. interest expense will be overstated.
d. interest expense will be understated.

54. Under the allowance method, writing off an uncollectible account
a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts.
c. affects only income statement accounts.
d. is not acceptable practice.

55. The net amount expected to be received in cash from receivables is termed the
a. cash realizable value.
b. cash-good value.
c. gross cash value.
d. cash-equivalent value.

56. If a company fails to record estimated bad debts expense,
a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.

57. Lifetime sells softball equipment. On November 14, they shipped $3,000 worth of softball uniforms to Palos Middle School, terms 2/10, n/30. On November 21, they received an order from Tinley High School for $1,800 worth of custom printed bats to be produced in December. On November 30, Palos Middle School returned $300 of defective merchandise. Lifetime has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the balance sheet as of November 30?
a. $2,700
b. $3,000
c. $4,500
d. $4,800

58. Syfy Company on July 15 sells merchandise on account to Eureka Co. for $5,000, terms 2/10, n/30. On July 20 Eureka Co. returns merchandise worth $2,000 to Syfy Company. On July 24 payment is received from Eureka Co. for the balance due. What is the amount of cash received?
a. $2,900
b. $2,940
c. $3,000
d. $5,000

59. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debt expense in the
a. direct write-off method.
b. percentage of receivables basis.
c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.

60. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer’s account becomes past-due.

61. When an account becomes uncollectible and must be written off,
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debt Expense should be credited.
d. Sales Revenue should be debited.

62. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles
a. will increase income in the period it is collected.
b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written off.
d. does not affect income in the period it is collected.

63. The percentage of sales basis of estimating expected uncollectibles
a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships.
c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.

64. An aging of a company’s accounts receivable indicates that $14,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $14,000.
b. debit to Allowance for Doubtful Accounts for $12,900.
c. debit to Bad Debt Expense for $12,900.
d. credit to Allowance for Doubtful Accounts for $14,000.

65. A debit balance in the Allowance for Doubtful Accounts
a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is used.

66. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.

67. An alternative name for Bad Debt Expense is
a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.

68. A reasonable amount of uncollectible accounts is evidence
a. that the credit policy is too strict.
b. that the credit policy is too lenient.
c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.

69. Bad Debt Expense is considered
a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.

70. The best managed companies will have
a. no uncollectible accounts.
b. a very strict credit policy.
c. a very lenient credit policy.
d. some accounts that will prove to be uncollectible.

71. Two methods of accounting for uncollectible accounts are the
a. allowance method and the accrual method.
b. allowance method and the net realizable method.
c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.

72. The allowance method of accounting for uncollectible accounts is required if
a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.

73. Bad Debt Expense is reported on the income statement as
a. part of cost of goods sold.
b. reducing gross profit.
c. an operating expense.
d. a contra-revenue account.

74. When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.

75. The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the
a. aging accounts receivable method.
b. direct write-off method.
c. percentage of receivables method.
d. percentage of sales method.

76. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales Revenue and a credit to Accounts Receivable.

77. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off.
b. Bad Debt Expense is debited when a specific account is written off as uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.

78. Allowance for Doubtful Accounts on the balance sheet
a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading “Other Assets.”
d. is offset against accounts receivable.

79. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. cash realizable value of total accounts receivable will decrease.
c. allowance account will increase.
d. cash realizable value of total accounts receivable will stay the same.

80. If an account is collected after having been previously written off,
a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected.
d. there will be both a debit and a credit to accounts receivable.

81. When an account is written off using the allowance method, accounts receivable
a. is unchanged and the allowance account increases.
b. increases and the allowance account increases.
c. decreases and the allowance account decreases.
d. decreases and the allowance account increases.

82. Two bases for estimating uncollectible accounts are:
a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue.
c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.

83. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debt expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.

84. Haven Company uses the percentage of sales method for recording bad debt expense. For the year, cash sales are $600,000 and credit sales are $2,700,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Haven Company make to record the bad debt expense?
a. Bad Debt Expense 33,000
Allowance for Doubtful Accounts 33,000
b. Bad Debt Expense 27,000
Allowance for Doubtful Accounts 27,000
c. Bad Debt Expense 27,000
Accounts Receivable 27,000
d. Bad Debt Expense 33,000
Accounts Receivable 33,000

85. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts
a. is relevant when using the percentage of receivables basis.
b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.

86. The direct write-off method of accounting for bad debts
a. uses an allowance account.
b. uses a contra-asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.

87. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.
c. balance sheet relationships are emphasized.
d. bad debt expense is always recorded in the period in which the revenue was recorded.

88. An aging of a company’s accounts receivable indicates that $5,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $900 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $5,000.
b. debit to Allowance for Doubtful Accounts for $4,100.
c. debit to Bad Debt Expense for $4,100.
d. credit to Allowance for Doubtful Accounts for $5,000.

89. An aging of a company’s accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $800 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $2,200.
b. debit to Bad Debt Expense for $3,000.
c. debit to Bad Debt Expense for $3,800.
d. credit to Allowance for Doubtful Accounts for $800.

90. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $32,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment, what is the amount of bad debt expense for that period?
a. $8,000
b. $24,000
c. $32,000
d. $40,000

91. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $15,000. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment, what is the amount of bad debt expense for that period?
a. $2,000
b. $13,000
c. $15,000
d. $17,000

92. Using the percentage of receivables method for recording bad debt expense, estimated uncollectible accounts are $14,000. If the balance of the Allowance for Doubtful Accounts is $2,000 debit before adjustment, what is the balance after adjustment?
a. $2,000
b. $12,000
c. $14,000
d. $16,000

93. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debt expense for the period?
a. $7,000
b. $31,000
c. $38,000
d. $45,000

94. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what is the amount of bad debt expense for the period?
a. $7,000
b. $31,000
c. $38,000
d. $45,000

95. In reviewing the accounts receivable, the cash realizable value is $16,000 before the write-off of a $1,500 account. What is the cash realizable value after the write-off?
a. $1,500
b. $14,500
c. $16,000
d. $17,500

96. In 2015, Warehouse 13 had net credit sales of $750,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2015, $29,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $150,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2015?
a. $150,000
b. $29,000
c. $28,000
d. $31,000

97. A company has net credit sales of $750,000 for the year and it estimates that uncollectible accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of $2,000 prior to adjustment, its balance after adjustment will be a credit of
a. $13,000.
b. $15,000.
c. $15,040.
d. $17,000.

98. In 2015, Chandler Company had net credit sales of $1,125,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $27,000. During 2015, $42,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $380,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2015?
a. $23,000
b. $38,000
c. $53,000
d. $97,500

99. Using the following information:
12/31/14
Accounts receivable $525,000
Allowance (35,000)
Cash realizable value $490,000

During 2015, sales on account were $145,000 and collections on account were $100,000. Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000.

The change in the cash realizable value from the balance at 12/31/14 to 12/31/15 was a
a. $36,000 increase.
b. $41,000 increase.
c. $44,000 increase.
d. $45,000 increase.

100. Using the following information:
12/31/14
Accounts receivable $525,000
Allowance (35,000)
Cash realizable value $490,000

During 2015, sales on account were $145,000 and collections on account were $100,000. Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000.

Bad debt expense for 2015 is
a. $4,000.
b. $5,000.
c. $9,000
d. $40,000.

101. During 2015, Alfred Inc. had sales on account of $198,000, cash sales of $81,000, and collections on account of $126,000. In addition, they collected $2,175 which had been written off as uncollectible in 2014. As a result of these transactions, the change in the accounts receivable balance indicates a
a. $69,825 increase.
b. $72,000 increase.
c. $150,825 increase.
d. $153,000 increase.

102. Kill Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
Accounts Receivable $850,000
Allowance for Doubtful Accounts 15,000
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
a. $15,000
b. $36,000
c. $50,100
d. $51,000

103. Jack Company provides for bad debt expense at the rate of 2% of credit sales. The following data are available for 2015:

Allowance for doubtful accounts, 1/1/15 (Cr.) $ 12,000
Accounts written off as uncollectible during 2015 9,000
Credit sales in 2015 1,200,000

The Allowance for Doubtful Accounts balance at December 31, 2015, should be
a. $3,000.
b. $21,000.
c. $24,000.
d. $27,000.

104. In 2015, Boyle Company had credit sales of $1,080,000 and granted sales discounts of $24,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $26,400. During 2015, $45,000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2015?
a. $13,080
b. $13,800
c. $31,680
d. $39,720

105. An analysis and aging of the accounts receivable of Hugh Company at December 31 revealed the following data:

Accounts Receivable $900,000
Allowance for Doubtful Accounts per books
before adjustment (Cr.) 50,000
Amounts expected to become uncollectible 56,000

The cash realizable value of the accounts receivable at December 31, after adjustment, is:
a. $794,000.
b. $844,000.
c. $850,000.
d. $894,000.

106. Herman Company has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Herman estimates that $70,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is:
a. $5,000.
b. $65,000.
c. $70,000.
d. $75,000.

107. On October 1, 2015, Milago Company sells (factors) $700,000 of receivables to Beanfield Factors, Inc. Beanfield assesses a service charge of 3% of the amount of receivables sold. The journal entry to record the sale by Milago will include
a. a debit of $700,000 to Accounts Receivable.
b. a credit of $721,000 to Cash.
c. a debit of $721,000 to Cash.
d. a debit of $21,000 to Service Charge Expense.

108. On March 1, 2015, Dick Miles purchased a suit at Kenny’s Fine Apparel Store. The suit cost $600 and Dick used his Kenny credit card. Kenny charges 2% per month interest if payment on credit charges is not made within 30 days. On April 30, 2015, Dick had not yet made his payment. What entry should Kenny make on April 30th?
a. Uncollectible Account 600
Accounts Receivable 600
b. Bad Debt Expense 588
Interest Expense 12
Accounts Receivable 600
c. Accounts Receivable 612
Interest Revenue 12
Sales Revenue 600
d. Accounts Receivable 12
Interest Revenue 12

109. Jeff Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 2% for its credit card use. The entry to record this transaction by Jeff Retailers will include a credit to Sales Revenue of $75,000 and a debit(s) to
a. Cash $73,500 and Service Charge Expense $1,500.
b. Accounts Receivable $73,500 and Service Charge Expense $1,500.
c. Cash $73,500 and Interest Expense $1,500.
d. Accounts Receivable $75,000.

110. XYZ Company accepted a national credit card for a $4,000 purchase. The cost of the goods sold is $2,400. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $1,480
b. Increase by $1,552
c. Increase by $1,600
d. Increase by $3,880

111. Major advantages of credit cards to the retailer include all of the following except the
a. issuer does the credit investigation of customers.
b. issuer undertakes the collection process.
c. retailer receives more cash from the credit card issuer.
d. All of these answers are correct.

112. The sale of receivables by a business
a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement.
c. is an indication that the business is owned by a factor.
d. can be a quick way to generate cash for operating needs.

113. If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)
a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.

114. If a company sells its accounts receivables to a factor,
a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.

115. Retailers generally consider sales from the use of national credit card sales as a
a. credit sale.
b. collection of an accounts receivable.
c. cash sale.
d. collection of a note receivable.

116. Receivables might be sold to
a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of receivables.
c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.

117. A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?
a. The loss section of the income statement will increase each time receivables are sold.
b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expense section of the income statement will increase each time accounts are sold.

118. T’Pol Furniture factors $900,000 of receivables to Trip Factors, Inc. Trip Factors assesses a 2% service charge on the amount of receivables sold. T’Pol Furniture factors its receivables regularly with Trip Factors. What journal entry does T’Pol make when factoring these receivables?
a. Cash 882,000
Loss on Sale of Receivables 18,000
Accounts Receivable 900,000
b. Cash 882,000
Accounts Receivable 882,000
c. Cash 900,000
Accounts Receivable 882,000
Gain on Sale of Receivables 18,000
d. Cash 882,000
Service Charge Expense 18,000
Accounts Receivable 900,000

119. When customers make purchases with a national credit card, the retailer
a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the credit card company.

120. The retailer considers Visa and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.

121. The basic issues in accounting for notes receivable include each of the following except
a. analyzing notes receivable.
b. disposing of notes receivable.
c. recognizing notes receivable.
d. valuing notes receivable.

122. A 60-day note receivable dated July 13 has a maturity date of
a. September 12.
b. September 11.
c. September 10.
d. September 13.

123. The maturity value of a $50,000, 9%, 60-day note receivable dated July 3 is
a. $50,000.
b. $50,750.
c. $54,500.
d. $59,000.

124. A 90-day note dated May 14 has a maturity date of
a. August 14.
b. August 12.
c. August 13.
d. August 15.

125. A 30-day note dated June 18 has a maturity date of
a. July 19.
b. July 18.
c. July 17.
d. July 16.

126. A promissory note
a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.

127. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by name.

128. The two key parties to a promissory note are the
a. maker and a bank.
b. debtor and the payee.
c. maker and the payee.
d. sender and the receiver.

129. When calculating interest on a promissory note with the maturity date stated in terms of days, the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used.
c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.

130. The maturity value of a $5,000, 9%, 60-day note receivable dated February 10th is
a. $5,000.
b. $5,038.
c. $5,075.
d. $5,450.

131. The interest on a $10,000, 8%, 1-year note receivable is
a. $800.
b. $10,000.
c. $10,080.
d. $10,800.

132. The maturity value of a $70,000, 8%, 3-month note receivable is
a. $70,467.
b. $70,560.
c. $71,400.
d. $75,600.

133. The interest on a $6,000, 6%, 60-day note receivable is
a. $60.
b. $120.
c. $180.
d. $360.

134. The interest on a $9,000, 6%, 90-day note receivable is
a. $135.
b. $270.
c. $405.
d. $540.

135. On November 1, Gentle Company received a $3,000, 6%, three-month note receivable. The cash to be received by Gentle Company when the note becomes due is:
a. $3,000.
b. $3,030.
c. $3,045.
d. $3,180.

136. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on January 15, 2015 would include a:
a. debit of $9,135 to Notes Receivable.
b. debit of $9,000 to Notes Receivable.
c. credit of $9,135 to Accounts Receivable.
d. credit of $9,000 to Notes Receivable.

137. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on March 15, 2015 if Pentel dishonors the note and collection is expected is:
a. Accounts Receivable—W. Pentel 9,000
Notes Receivable 9,000
b. Accounts Receivable—W. Pentel 9,135
Notes Receivable 9,000
Interest Revenue 135
c. Accounts Receivable—W. Pentel 8,865
Interest Lost 135
Notes Receivable 9,000
d. Bad Debt Expense 9,135
Notes Receivable 9,135

138. Notes receivable are recognized in the accounts at
a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.

139. A note receivable is a negotiable instrument which
a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.

140. A company that receives an interest bearing note receivable will
a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.

141. The face value of a note refers to the amount
a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.

142. Reck Company receives a $15,000, 3-month, 8% promissory note from Fey Company in settlement of an open accounts receivable. What entry will Reck Company make upon receiving the note?
a. Notes Receivable 15,300
Accounts Receivable—Fey Company 15,300
b. Notes Receivable 15,300
Accounts Receivable—Fey Company 15,000
Interest Revenue 300
c. Notes Receivable 15,000
Interest Receivable 300
Accounts Receivable—Fey Company 15,000
Interest Revenue 300
d. Notes Receivable 15,000
Accounts Receivable—Fey Company 15,000

143. When a note is accepted to settle an open account, Notes Receivable is debited for the note’s
a. net realizable value.
b. maturity value.
c. face value.
d. face value plus interest.

144. Short-term notes receivable are reported at
a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.

145. Short-term notes receivables
a. have a related allowance account called Allowance for Doubtful Notes Receivable.
b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to determine cash realizable value.
d. present the same valuation problems as long-term notes receivables.

146. When a note receivable is dishonored,
a. interest revenue is never recorded.
b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.

147. Randie Company lends Luann Company $10,000 on April 1, accepting a four-month, 6% interest note. Randie Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?
a. Note Receivable 10,000
Cash 10,000
b. Interest Receivable 50
Interest Revenue 50
c. Cash 50
Interest Revenue 50
d. Interest Receivable 200
Interest Revenue 200

148. When a note receivable is honored, Cash is debited for the note’s
a. net realizable value.
b. maturity value.
c. gross realizable value.
d. face value.

149. Magneto Company had net credit sales during the year of $1,350,000 and cost of goods sold of $810,000. The balance in accounts receivable at the beginning of the year was $180,000, and the end of the year it was $120,000. What was the accounts receivable turnover?
a. 5.6
b. 7.5
c. 9.0
d. 11.3

150. The average collection period for accounts receivable is computed by dividing 365 days by
a. net credit sales.
b. average accounts receivable.
c. ending accounts receivable.
d. accounts receivable turnover.

151. The average collection period is computed by dividing
a. net credit sales by average gross accounts receivable.
b. net credit sales by ending gross accounts receivable.
c. the accounts receivable turnover by 365 days.
d. 365 days by the accounts receivable turnover.

152. The financial statements of Danielle Manufacturing Company report net sales of $750,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Danielle?
a. 5 times
b. 8.3 times
c. 10 times
d. 12.5 times

153. The financial statements of Danielle Manufacturing Company report net sales of $750,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days?
a. 29.2
b. 36.5
c. 43.8
d. 73

154. The financial statements of Gervais Manufacturing Company report net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Gervais?
a. 6.3 times
b. 8.3 times
c. 10 times
d. 12.5 times

155. The financial statements of Gervais Manufacturing Company report net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days?
a. 29.2 days
b. 36.5 days
c. 43.8 days
d. 57.9 days

156. Which of the following are also called trade receivables?
a. Accounts receivable
b. Other receivables
c. Advances to employees
d. Income taxes refundable

157. On February 1, 2015, Fugit Company sells merchandise on account to Armen Company for $6,500. The entry to record this transaction by Fugit Company is
a. Sales Revenue 6,500
Accounts Payable 6,500
b. Cash 6,500
Sales Revenue 6,500
c. Accounts Receivable 6,500
Sales Revenue 6,500
d. Notes Receivable 6,500
Accounts Receivable 6,500

158. Writing off an uncollectible account under the allowance method requires a debit to
a. Accounts Receivable.
b. Allowance for Doubtful Accounts.
c. Bad Debt Expense.
d. Uncollectible Accounts Expense.

159. When the allowance method of recognizing bad debts expense is used, the entry to recognize that expense
a. increases net income.
b. decreases current assets.
c. has no effect on current assets.
d. has no effect on net income.

160. The direct write-off method
a. is acceptable for financial reporting purposes.
b. debits Allowance for Doubtful Accounts to record write-offs of accounts.
c. shows only actual losses from uncollectible accounts receivable.
d. estimates bad debt losses.

161. Deborah Company’s account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $50,000 (Cr.), respectively. An aging of accounts receivable indicated that $180,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is
a. $130,000.
b. $180,000.
c. $210,000.
d. $230,000.

162. In recording the sale of accounts receivable, the commission charged by a factor is recorded as
a. Bad Debt Expense.
b. Commission Expense.
c. Loss on Sale of Receivables.
d. Service Charge Expense.

163. Schwartzman Co., makes a credit card sale to a customer for $800. The credit card sale has a grace period of 30 days and then an interest charge of 1.5% per month is added to the balance. If the unpaid balance on the above sale is $640 at the end of the grace period, the interest charge is
a. $6.40.
b. $9.60.
c. $11.00.
d. $16.00.

164. The interest rate specified on any note is for a
a. day.
b. month.
c. week.
d. year.

165. On February 1, Ville Company received a $6,000, 5%, four-month note receivable. The cash to be received by Ville Company when the note becomes due is
a. $100.
b. $6,000.
c. $6,100.
d. $6,300.

166. The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to
a. Notes Receivable.
b. Cash.
c. Allowance for Doubtful Accounts.
d. Accounts Receivable.

167. Which of the following statements concerning receivables is incorrect?
a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful accounts should be reported.
d. Interest revenue and gain on sale of notes receivable are shown under other revenues and gains.

168. The accounts receivable turnover is computed by dividing
a. total sales by average net accounts receivable.
b. net credit sales by average net accounts receivable.
c. total sales by ending net accounts receivable.
d. net credit sales by ending net accounts receivable.

169. Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these are essentially the same for IFRS and GAAP.

170. Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these are essentially the same for IFRS and GAAP.

171. IFRS requires loans and receivables to be recorded at
a. amortized cost.
b. amortized cost, adjusted for allowances for doubtful accounts.
c. unamortized cost.
d. unamortized cost, adjusted for allowances for doubtful accounts.

172. IFRS sometimes refers to allowances as
a. revenues.
b. discounts.
c. provisions.
d. reserves.

173. IFRS
a. implies that receivables with different characteristics should be reported separately.
b. requires that receivables with different characteristics should be reported separately.
c. implies that receivables with different characteristics should be reported as one unsegregated amount.
d. requires that receivables with different characteristics should be reported as one unsegregated amount.

174. Which board(s) has(have) worked to implement fair value measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.

175. Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.

176. Which is part of IFRS accounting for financial instruments?
Disclosure of fair value information Optional recording of some financial
for receivables in the notes instruments at fair value
a. Yes Yes
b. Yes No
c. No Yes
d. No No

177. Which requires a two-tiered approach to test whether the value of loans and receivables are impaired?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes

178. What criteria are used to determine how to record a factoring transaction?
GAAP IFRS
a. risks and rewards, and loss of control risks and rewards, and loss of control
b. risks and rewards, and loss of control loss of control
c. loss of control loss of control
d. loss of control risks and rewards, and loss of control

179. Which permits partial derecognition of receivables?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes

BRIEF EXERCISES
BE 180
Record the following transactions for Lett Company.
1. On August 4, Lett sold merchandise on account to Smiley Company for $610, terms 2/10, n/30.
2. On August 7, Lett granted Smiley a sales allowance and reduced the cost of the merchandise by $60 because some of the goods were slightly damaged.
3. On August 12, Smiley paid the account in full.

BE 181
At December 31, 2015, Wynne Company reported Accounts Receivable of $45,000 and Allowance for Doubtful Accounts of $3,500. On January 7, 2016, Brown Enterprises declares bankruptcy and it is determined that the receivable of $1,200 from Brown is not collectible.
1. What is the cash realizable value of Accounts Receivable at December 31, 2015?
2. What entry would Wynne make to write off the Brown account?
3. What is the cash realizable value of Accounts Receivable after the Brown account is written off?

BE 182
Eaton Company’s ledger at the end of the current year shows Accounts Receivable of $150,000.

Instructions
a. If Allowance for Doubtful Accounts has a credit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period.
b. If Allowance for Doubtful Accounts has a debit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period.

BE 183
Stine Co. sells Christmas angels. Patel determines that at the end of December, it has the following aging schedule of Accounts Receivable:

Customer
Total
Not Yet Due Number of Days Past Due
1–30 31–60 61–90 Over 90
DV Gannon $500 $300 $200
JJ Joysen 300 100 200
NJ Bell 150 50 100
JC Werly 200 200
? 300 300 250 200 100
% uncollectible 1% 5% 10% 20% 50%
Total Estimated Uncollectible Amounts ? ? ? ? ? ?
Compute the net receivables based on the above information at the end of December. (There was no beginning balance in the Allowance for Doubtful Accounts).

BE 184
Newton Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred.

Oct. 15 Sold $15,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge.

25 Made sales of $800 on VISA credit cards. The credit card service charge is 2%.

Instructions
Journalize the transactions.

BE 185
Determine the interest on the following notes:

(a) $2,000 at 6% for 90 days.
(b) $900 at 9% for 5 months.
(c) $3,000 at 8% for 60 days
(d) $1,600 at 7% for 6 months

BE 186
Ace Distributors has the following transactions related to notes receivable during the last month of the year.
Dec. 1 Loaned $15,000 cash to K. Hogan on a 1-year, 6% note.
16 Sold goods to F. Manning, receiving a $4,800, 60-day, 7% note.
31 Accrued interest revenue on all notes receivable.

BE 186 (Cont.)

Instructions
Journalize the transactions for Ace Distributors.

BE 187
Compute the maturity value for each of the following notes receivable.

1. A $5,000, 6%, 3-month note dated July 20.

Maturity value $____________.

2. A $12,000, 9%, 150-day note dated August 5.

Maturity value $____________.

BE 188
On February 7, Jackson Company sold goods on account to Phillips Enterprises for $5,200, terms 2/10, n/30. On March 9, Phillips gave Jackson a 60-day, 12% promissory note in settlement of the account. Record the sale and the acceptance of the promissory note on the books of Jackson Company.

BE 189
On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips honors the note on May 8. Record the collection of the note and interest by Jackson assuming that no interest has been accrued.

BE 190
On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips dishonors the note on May 8. Record the entry that Jackson would make when the note is dishonored, assuming that no interest has been accrued.

BE 191
The following data exists for Carley Company.

2015 2014
Accounts Receivable $ 50,000 $ 70,000
Net Sales 500,000 410,000

Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2015.

EXERCISES
Ex. 192
Presented below are various receivable transactions entered into by Beran Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet.

a. Loaned a company officer $5,000.
b. Accepted a $3,000 promissory note from a customer as payment on account.
c. Determined that a $10,000 income tax refund is due from the IRS.
d. Sold goods to a customer on account for $4,000.
e. Recorded $500 accrued interest on a note receivable due next year.
f. Advanced $1,400 to a trusted employee.

Ex. 193
Prepare journal entries to record the following transactions entered into by Valente Company:

2014
June 1 Received a $10,000, 12%, 1-year note from Andrea Foley as full payment on her account.

Nov. 1 Sold merchandise on account to Patton, Inc. for $12,000, terms 2/10, n/30.

Nov. 5 Patton, Inc. returned merchandise worth $500.

Nov. 9 Received payment in full from Patton, Inc.

Dec. 31 Accrued interest on Foley’s note.

Ex. 193 (Cont.)
2015
June 1 Andrea Foley honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2015.

Ex. 194
Record the following transactions for Adcock Company.
1. On April 12, sold $11,000 of merchandise to Milton Inc., terms 2/10, n/30.
2. On April 15, Milton returned $2,000 of merchandise.
3. On April 22, Milton paid for the merchandise.

Ex. 195
(a) On January 6, Whitson Co. sells merchandise on account to Garcia Inc. for $7,000, terms 2/10, n/30. On January 16, Garcia Inc. pays the amount due. Prepare the entries on Whitson’s books to record the sale and related collection.
(b) On January 10, Jill Hoyle uses her Berkman Co. credit card to purchase merchandise from Berkman Co. for $9,000. On February 10, Hoyle is billed for the amount due of $9,000. On February 12, Hoyle pays $4,000 on the balance due. On March 10, Hoyle is billed for the amount due, including interest at 2% per month on the unpaid balance as of February 12. Prepare the entries on Berkman Co.’s books related to the transactions that occurred on January 10, February 12, and March 10.

Ex. 196
Fleming Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2014, and December 31, 2015, appear below:
12/31/14 12/31/15
Net Credit Sales $400,000 $500,000
Accounts Receivable 60,000 80,000
Allowance for Doubtful Accounts 5,200 ?

Instructions
(a) Record the following events in 2015.
Aug. 10 Determined that the account of Sue King for $800 is uncollectible.
Sept. 12 Determined that the account of Tom Young for $3,700 is uncollectible.
Oct. 10 Received a check for $500 as payment on account from Sue King, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November.
Nov. 15 Received a check for $300 from Sue King as payment on her account.

Ex. 196 (Cont.)
(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2015.
(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2015?

Ex. 197
Molina Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2015, before the current year’s provision for uncollectible accounts. An aging of the accounts receivable revealed the following:
Estimated Percentage
Uncollectible
Current Accounts $120,000 1%
1–30 days past due 20,000 3%
31–60 days past due 10,000 6%
61–90 days past due 10,000 12%
Over 90 days past due 8,000 30%
Total Accounts Receivable $168,000

Ex. 197 (Cont.)
Instructions
(a) Prepare the adjusting entry on December 31, 2015, to recognize bad debt expense.
(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current year’s provision for uncollectible accounts. Prepare the adjusting entry for the current year’s provision for uncollectible accounts.
(c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales, that sales for 2015 were $550,000, and that Allowance for Doubtful Accounts had a $650 credit balance before adjustment. Prepare the adjusting entry for the current year’s provision for bad debts.

Ex. 198
Compute bad debt expense based on the following information:

(a) RLF Company estimates that 2% of net credit sales will become uncollectible. Sales revenue are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful accounts has a $6,000 credit balance.

(b) RLF Company estimates that 10% of accounts receivable will become uncollectible. Accounts receivable are $100,000 at the end of the year, and the allowance for doubtful accounts has a $500 debit balance.

Ex. 199
The December 31, 2014 balance sheet of Barone Company had Accounts Receivable of $400,000 and a credit balance in Allowance for Doubtful Accounts of $32,000. During 2015, the following transactions occurred: sales on account $1,500,000; sales returns and allowances, $50,000; collections from customers, $1,250,000; accounts written off $36,000; previously written off accounts of $6,000 were collected.

Instructions
(a) Journalize the 2015 transactions.
(b) If the company uses the percentage-of-sales basis to estimate bad debt expense and anticipates 3% of net sales to be uncollectible, what is the adjusting entry at December 31, 2015?
(c) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 8% of accounts receivable, what is the adjusting entry at December 31, 2015?
(d) Which basis would produce a higher net income for 2015 and by how much?

Ex. 200
Megan’s Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2015, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,800,000 during 2015. An aging analysis of the accounts receivable indicated that $40,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.

Instructions
Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage-of-sales basis and (2) the percentage-of-receivables basis under each of the following independent assumptions:
(a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment.
(b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment.

Ex. 201
The income statement approach to estimating uncollectible accounts expense is used by Kerley Company. On February 28, the firm had accounts receivable in the amount of $437,000 and Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts expense would amount to 1% of net credit sales made during February. On March 10, an accounts receivable from Kathy Black for $6,100 was determined to be uncollectible and written off. However, on March 31, Black received an inheritance and immediately paid her past due account in full.

Instructions
(a) Prepare the journal entries made by Kerley Company on the following dates:
1. February 28
2. March 10
3. March 31
(b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31.

Ex. 202
Handel Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions:

January 5 Sold merchandise to Terry Richman for $2,000, terms n/15.

April 15 Received $600 from Terry Richman on account.

August 21 Wrote off as uncollectible the balance of the Terry Richman account when she declared bankruptcy.

October 5 Unexpectedly received a check for $300 from Terry Richman. It is not felt any more will be received from Richman

Ex. 203
Avett Furniture Store has credit sales of $400,000 in 2015 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2015, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule of accounts receivable and estimates that $7,000 will prove to be uncollectible.

On March 4, 2016, the credit manager authorizes a write-off of the $1,200 balance owed by B. Fernitti.

Instructions
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2015.
(b) Show the balance sheet presentation of accounts receivable on December 31, 2015.
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $160,000 and the balance of Allowance for Doubtful Accounts is a credit of $3,000. Make the appropriate entry to record the write-off of the Fernetti account. Also show the balance sheet presentation of accounts receivable before and after the write-off.

Ex. 204
An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct.

Dec. 17 Cash 2,940
Sales Discounts 60
Accounts Receivable 3,000
(To record collection of 12/4 sales, terms 2/10, n/30)

20 Cash 18,360
Notes Receivable 18,000
Interest Revenue 360
(Collection of $18,000, 8%, 90 day note dated Sept. 21.
Interest had been accrued through Nov. 30.)

Ex. 204 (Cont.)
27 Cash 1,000
Bad Debt Expense 1,000
(Collection of account previously written off as
uncollectible under allowance method)

31 Bad Debt Expense 600
Allowance for Doubtful Accounts 600
(To recognize estimated bad debts based on 1% of
net sales of $600,000)

Instructions
Prepare the correcting entries.

Ex. 205
Prepare the necessary journal entry for the following transaction. Linton Company sold $270,000 of its accounts receivables to a factor. The factor charges a 3% fee.
Ex. 206
Norton Company has accounts receivable of $40,000 in its general ledger at July 31: During August, the following transactions occurred.

Aug. 1 Added 1% finance charges to $13,000 of credit card balances for not paying within the 30 day grace period.

15 Sold $21,000 of accounts receivable to Iron Factors Inc. who charge a 4% commission.

28 Collected $8,000 from Norton credit card customers including $400 of finance charges previously billed.

Instructions
(a) Journalize the transactions.
(b) Indicate the statement presentation of finance and service charges.

Ex. 207
Listed below are two independent situations involving the disposition of receivables.

1. Morales Company sells $320,000 of its receivables to Instant Factors, Inc. Instant Factors assesses a finance charge of 3% of the amount of receivables sold.

Instructions
Prepare the journal entry to record the sale of the receivables on Morales Company’s books.

2. A restaurant is the site for a large company party. The bill totals $3,400 and is charged by the patron on a Visa credit card.

Ex. 207 (Cont.)

Instructions
Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the restaurant’s books.

Ex. 208
Wainwright Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred.

Jan. 15 Made Wainwright credit card sales totaling $24,000. (There were no balances prior to January 15.)
20 Made Visa credit card sales (service charge fee 2%) totaling $7,000.
Feb. 10 Collected $14,000 on Wainwright credit card sales.
15 Added finance charges of 1% to Wainwright credit card balance.

Instructions (a) Journalize the transactions for Wainwright Stores.
(b) Indicate the statement presentation of the financing charges and the credit card service charge expense for Wainwright Stores.

Ex. 209
Compute the maturity date and the maturity value associated with each of the following notes receivables.

1. A $15,000, 6%, 3-month note dated April 20.
Maturity date ___________, Maturity value $____________.

2. A $25,000, 8%, 72-day note dated June 10.
Maturity date ___________, Maturity value $____________.

3. An $8,000, 9%, 30-day note dated September 20.
Maturity date ___________, Maturity value $____________.

Ex. 210
Compute the maturity date and interest for the following notes.
Dates of Notes Terms Principal Interest Rate
(a) April 17 60 days $60,000 6%
(b) August 11 3 months 80,000 8%

Ex. 211
Compute the missing amount for each of the following notes:

Principal Annual Interest Rate Time Total Interest
———————————————————————————————————————
(a) $40,000 10% 2.5 years ?
———————————————————————————————————————
(b) $120,000 ? 9 months $7,200
———————————————————————————————————————
(c) ? 10% 90 days $1,500
———————————————————————————————————————
(d) $40,000 9% ? $1,200
———————————————————————————————————————

Ex. 212
Joe’s Supply Co. has the following transactions related to notes receivable during the last 2 months of 2015.

Nov. 1 Loaned $20,000 cash to Sara Rondelli on a 1-year, 12% note.
Dec. 11 Sold goods to Phair, Inc., receiving a $11,700, 90-day, 8% note.
16 Received an $12,000, 6-month, 9% note in exchange for Grace Tanner’s outstanding accounts receivable.
31 Accrued interest revenue on all notes receivable.

Instructions (a) Journalize the transactions for Joe’s Supply Co.
(b) Record the collection of the Rondelli note at its maturity in 2016.

Ex. 213
Morton Company had the following select transactions.

Apr. 1, 2015 Accepted Remington Company’s 1-year, 12% note in settlement of a $25,000 account receivable.
July 1, 2015 Loaned $15,000 cash to Jenny Green on a 9-month, 10% note.
Dec. 31, 2015 Accrued interest on all notes receivable.
Apr. 1, 2016 Received principal plus interest on the Remington note.
Apr. 1, 2016 Jenny Green dishonored its note: Morton expects it will eventually collect.

Instructions Prepare journal entries to record the transactions. Morton prepares adjusting entries once a year on December 31.

Ex. 214
Prepare the necessary journal entries for the following transactions for Kennedy Co.
May 25 Kennedy Co. received a $30,000, 2-month, 6% note from Holt Company in settlement of an account receivable.
July 25 Kennedy Co. received payment on the Holt note.

Ex. 215
Record the following transactions in general journal form for Karen Heller Company.

July 1 Received a $20,000, 8%, 3-month note, dated July 1, from Nancy Freeman in payment of her open account.

Oct. 1 Received notification from Nancy Freeman that she was unable to honor her note at this time. It is expected that Freeman will pay at a later date.

Nov. 15 Received full payment from Nancy Freeman for her note receivable previously dishonored.

Ex. 216
Fine Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Fine Boat Company.

Feb. 12 Accepted a $25,000, 6%, 60-day note from Bob Yates for a 24-foot motorboat built to his specifications.

April 14 Received notification from Bob Yates that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

May 26 Received a check from Bob Yates for the total amount owed.

June 10 Received notification by the bank that Bob Yates check was being returned “NSF” and that Mr. Yates had declared personal bankruptcy.

Ex. 217
The following information is available for Edmiston Company.
Beginning accounts receivable $ 70,000 Ending accounts receivable 110,000 Net sales 990,000

Instructions Compute the accounts receivable turnover and the average collection period.

Ex. 218
Renfro Company had accounts receivable of $100,000 on January 1, 2015. The only transactions that affected accounts receivable during 2015 were net credit sales of $1,200,000, cash collections of $1,000,000, and accounts written off of $30,000.

Instructions
(a) Compute the ending balance of accounts receivable.
(b) Compute the accounts receivable turnover for 2015.
(c) Compute the average collection period in days.

COMPLETION STATEMENTS
219. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account.

220. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable.

221. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers.

222. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis.

223. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method.

224. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet.

225. When the allowance method is used to account for uncollectible accounts, the ______________ is credited when an account is determined to be uncollectible.

226. The _____________ basis of estimating uncollectibles provides a better _____________ of bad debt expense with sales revenue and therefore emphasizes income statement relationships.

227. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes balance sheet relationships.

228. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer.

229. A finance company or bank that purchases receivables from businesses is known as a ______________.

230. A 75-day note receivable dated June 10 would mature on ______________.

231. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________.

232. A note which is not paid on the maturity date is said to be ______________.

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

A. Aging of receivables F. Percentage of receivables basis
B. Direct write-off method G. Factoring
C. Promissory note H. Dishonored note
D. Trade receivables I. Average collection period
E. Percentage of sales basis J. Credit card sales

1. A written promise to pay a specified amount on demand or at a definite time.
2. Sales that involve the customer, the retailer, and the credit card issuer.
3. Emphasizes the matching of costs and revenues in the same period.
4. Amounts owed by customers from the sale of goods and services.
5. A note which is not paid in full at maturity.
6. Analysis of customer account balances by length of time they have been unpaid.
7. Emphasizes expected cash realizable value of accounts receivable.
8. Generally not acceptable for financial reporting purposes.
9. The amount of time that a receivable is outstanding.
10. Sale of accounts receivable to a factor.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 234
Management can choose between two bases in calculating the estimated uncollectible accounts under the allowance method. One basis emphasizes an income statement viewpoint whereas the other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two approaches. How do the different points of view affect the amount recognized as Bad Debt Expense during the accounting period?

S-A E 235
Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa, MasterCard).

S-A E 236
Your friend Jenny has opened an office supply store. She will extend open credit to local businesses and is concerned about potential bad debts. What can Jenny do to reduce potential bad debts?

S-A E 237
Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees.

S-A E 238
An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why are companies selling their receivables?

S-A E 239
Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable.

S-A E 240 (Ethics)
Seaver Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Seaver Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Seaver Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational.
Required:
Did Seaver Books act ethically in reinstating the debt of one client, and not the other? Explain.

S-A E 241 (Communication)
Petersen Company received a letter from Jane Kimler, a customer. Jane had purchased $425 worth of clothing from Petersen on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Petersen. Her total debt presently, with interest and late fees, is $351.13.

Jane sent a letter to Petersen in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Petersen certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn’t want to be embarrassed by bill collectors, either. She especially didn’t want her parents to find out that she had not paid her debts. Having Petersen write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Petersen were among the best she had ever owned, and that she “told everybody” that Petersen was definitely the best place to get clothes.

S-A E 241 (Cont.)

Required:
You are the accounting manager for Petersen. Write a short letter to Jane explaining why her debt cannot be written off.

CHALLENGE EXERCISES
CE 1
Presented below are selected transactions of Palmer Company. Palmer sells in large quantities to other companies and also sells its product in a small retail outlet.

March 1 Sold merchandise on account to Grey Company for $6,000, terms 2/10, n/30.
3 Grey Company returned merchandise worth $600 to Palmer.
9 Palmer collected the amount due from Grey Company from the March 1 sale.
15 Palmer sold merchandise for $10,000 in its retail outlet. The customers used their Heinrich credit card.
31 Palmer added 1 monthly interest to the customers’ credit card balance.
April 10 Palmer collected $3,050 from credit card customers.

Instructions

(a) Prepare journal entries for the transactions above.
(b) What is the balance from credit card transactions in Accounts Receivable after the April 10 transaction?

CE 2
The ledger of Maxx Company at the end of the current year shown Accounts Receivable $170,000, Sales $1,200,000, and Sales Returns and Allowances $50,000.

Instructions
(a) If Maxx uses the direct write-off method to account for uncollectible account, journalize the adjusting entry at December 31, assuming Maxx determines that Barkley Company’s $2,400 balance is uncollectible.
(b) If allowance for Doubtful account has a credit balance of 3,500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of account receivable.
(c) If allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

CE 3
Presley Supply Co. has the following transaction related to notes receivable during the last 2 months of 2014.
Nov. 1 Loaned $30,000 cash to Logan Ransey on a 1-year, 10% note.
Dec. 11 Sold goods to be Joe Noland, Inc., receiving a $9,000, 90-day, 8% note.
16 Received a $4,000, 6-month, 9% note in exchange for Jane Brock’s outstanding accounts receivable.
31 Accrued interest revenue on all notes receivable.

Instructions
(a) Journalize the above transactions for Presley Supply Co. Round interest to the nearest dollar.
(b) Record the collection of the Ransey note at its maturity in 2015.
(c) Assume Ransey dishonors its note at its maturity in 2015; Presley expects to eventually collect the note. Record the dishonors of the Ransey note.