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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.

CIS 505 Week 11 Discussion Questions – Strayer University New

CIS/505 Week 11 Discussion Questions

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Week 11 DQ 1
Future Outlook. Please respond to the following:

• Of the numerous forms of communication technologies presented in this course, predict the first form of technology to be phased out by a newer and improved technology. Explain the limitations of this technology and the reason for its speculated obsolesce.
• Speculate the technology that will replace the previously mentioned technology above. Describe the features, capabilities, or basic advantages this technology will have over its predecessor.

Week 11 DQ 2
Course Wrap-Up. Please respond to the following:

• Discuss how you can apply at least four of the weekly course learning outcomes throughout this course to your professional or personal life.
• Select your favorite technology discussed in this course. Imagine today’s world without that technology. Explain the issues and impact this change would make.

BUS 365 Week 11 Quiz – Strayer University New

BUS/365 Week 11 Quiz – Strayer

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Quiz 10 Chapter 13 and 14

Business Process Management and Systems Development

Multiple Choice

1. __________ are the building blocks of each functional area, e.g., accounts receivable (A/R) and accounts payable (A/P)
a) IT procedures
b) Business processes
c) Business strategies
d) Competitive forces

3

2. __________ is a technology approach to implementing a business process, but it’s only part of the technology required to implement business processes.
a) MIS
b) BPM
c) SaaS
d) SOA

3

3. Microsoft International’s lack of standardized business processes and process documentation had a number of adverse impacts on the HR team. Which is not one of those adverse impacts?
a) Decrease in errors by new hires
b) Increased the time and cost to train new employees
c) Limited ability to review their business processes
d) Decreased business process efficiency

4. Which is not one of the benefits that Microsoft International achieved through the use of Visio and business process modeling?
a) Significant savings in labor hours through increased process efficiency
b) Decrease in the training time of newly hired employees
c) Improved decision making through visual process analysis
d) Improved relationships with supply chain partners

5. When you break it down, you see that a business process is actually __________.
a) a project of known scope with an assigned budget
b) a loosely defined approach to solving an unstructured problem
c) a series of individual tasks executed in a specific order
d) clearly defined and automated by software

6. A process has inputs and outputs that are __________, which is necessary so it can be managed.
a) qualitative
b) measurable
c) visual
d) summary metrics

7. Business processes integrate __________.
a) software and hardware
b) ISs and people
c) data and models
d) dashboards and scoreboards

8. The __________ spec, also called the technical spec, is important to managers because it identifies how the business process will be implemented in as much detail as possible.
a) evaluation
b) implementation
c) project
d) design

9. During the implementation stage, __________ tests are critical because they determine whether the process is designed well from users’ perspective.
a) user acceptance
b) functional acceptance
c) system acceptance
d) integration

10. A(n) __________ is a set of technologies used for exchanging data between applications and for connecting processes with other systems across the organization, and with business partners.
a) ERP
b) mashup
c) SOA
d) Web service

11. During the implementation stage, __________ tests are critical because that is when analysts test whether the process performs its functions.
a) user acceptance
b) functional acceptance
c) system acceptance
d) technical acceptance

12. During the implementation stage, __________ tests are conducted by technical experts who attest that the process is integrated correctly with inputs and outputs of other processes and data sources and data stores
a) user acceptance
b) functional acceptance
c) system acceptance
d) integration acceptance

13. In the short term, business process management (BPM) helps companies __________.
a) improve profitability by reducing waste and costs
b) become more responsive to business changes
c) increase sales revenues and profit margins
d) all of the above

14. In the long term, business process management (BPM) helps companies __________.
a) improve profitability by reducing waste and costs
b) become more responsive to business changes
c) increase sales revenues and profit margins
d) all of the above

15. After decades of business process reengineering attempts, organizations still have problems with their business operations. What are those problems?
a) They duplicate processes
b) They perform hundreds of non-core tasks that should be outsourced
c) They spend vast amounts on proprietary process-management software that’s difficult to update
d) All of the above

16. British Telecom, United Airlines, and other companies that focused their BPM initiatives on process automation and cost savings had achieved significant operational efficiencies __________.
a) and higher market share
b) but lost their competitive edge and fell short of their performance targets
c) but only for a short time as competitors copied their efforts
d) because they were linked to their business strategies.

17. Changes to business apps that were needed prior to year 2000 were tedious and time-consuming because they were tightly coupled programs written in __________.
a) COBOL
b) Java
c) Visio
d) Flash

18. __________ components have minimal dependence on each other, which simplifies testing, maintenance and troubleshooting because problems are easy to isolate and unlikely to spread.
a) Tightly coupled
b) Hardwired
c) Loosely connected
d) COBOL

19. The advantage of the __________ is that any tier can be upgraded or replaced independently as business requirements or technology change.
a) tightly coupled architecture
b) middleware and graphical user-interface
c) three-tier software architecture
d) four-module tiered architecture

20. What was the underlying reason for the failure of the 2010 U.S. Census Bureau’s Handheld Project?
a) Failure of top management in the bureau to assess and mitigate risks of such a major project
b) Technical and database failures
c) Poor project management approach
d) Insufficient training of the census takers on how to use the handheld devices

21. Options for the acquisition of complex IT applications are all of the following except:
a) Built in-house
b) Custom-made by a vendor
c) Leased from an application service provider (ASP)
d) Out-of-the-box

22. For in-house development, the __________ option should be considered only for specialized IT apps for which components are not available because this option is expensive and slow.
a) build from components
b) build from scratch
c) integrating applications
d) prototyping

23. End-user development has risks and limitations, which include each of the following except:
a) End users may not be skilled enough in computers, so quality and cost may be jeopardized.
b) End users may not take time to document their work
c) End users may neglect proper security measures.
d) There may be an endless loop of prototype revisions.

24. Projects are managed by managing the triple constraints. Which is not one of those constraints?
a) approval
b) scope
c) time
d) budget

25. A project plan is specified in a __________.
a) resource pool
b) Gantt chart
c) work breakdown structure (WBS)
d) critical path

26. Project managers need to recognize the risk of __________, which is the piling up of small changes that by themselves are manageable, but collectively can cause significant project growth.
a) over allocation
b) critical path
c) triple constraints
d) scope creep

27. Project management includes three basic operations. Which is not one of those operations?
a) planning
b) budgeting
c) organizing
d) controlling

28. Project managers must manage the __________, which consists of tasks that must start and finish on schedule or the project will be delayed unless corrective action is taken.
a) over allocation
b) critical path
c) triple constraints
d) scope creep

29. The success of a project manager depends on all of the following except:
a) use of the critical path method and Gantt charts
b) clear, open, and timely communication
c) accurate, timely, and complete information
d) commitment from team members

30. The __________ is the traditional systems development method used by organizations for large IT projects such as IT infrastructure.
a) prototyping method
b) systems development life cycle (SDLC)
c) critical path method
d) sourcing method

31. Systems development involves __________, which is the revising of results of any development process when new information makes revision the smart thing to do.
a) iteration
b) scope creep
c) constraints
d) prototyping

32. The first stage of the SDLC is __________ to understand the business problem or opportunity.
a) systems analysis
b) systems investigation
c) prototyping
d) systems design

33. During the systems investigation stage, __________ studies are done to determine if the hardware, software, and communications components can be developed and/or acquired to solve the business problem.
a) economic feasibility
b) technical feasibility
c) ROI
d) NPV

34. During the systems investigation stage, __________ studies are done to assess the skills and the training needed to use the new IS.
a) economic feasibility
b) technical feasibility
c) organizational feasibility
d) behavioral feasibility

35. Covert resistance to a new IS from employees may take the form of __________.
a) sabotaging the new system by entering data incorrectly
b) continuing to do their jobs using their old methods
c) complaining about the new system for extended time
d) All of the above

36. __________ specifications include the design of outputs, inputs, processing, databases, telecommunications, controls, security, and IS jobs.
a) Physical design
b) Logical design
c) End-user
d) Systems analysis

37. When the system’s logical and physical designs specifications are agreed upon and approved by all participants, they __________.
a) should not be changed
b) should be flexible to changes
c) are used to develop the prototype
d) determine the budget and timeline for development

38. To add rigor to the programming process, programmers use __________ that improve the flow of the program by decomposing the computer code into modules.
a) GOTO statements
b) flowcharts
c) structured programming techniques
d) All of the above

39. Which is not a characteristic of program testing?
a) Testing verifies that computer code works correctly under various conditions.
b) Syntax errors are easier to find than logic errors because they prevent the program from running.
c) Logic errors are difficult to detect because they permit the program to run but result in incorrect output.
d) Proper testing can be done quickly and with little effort.

40. __________ conversion is the least expensive and highest risk IS conversion strategy because the old system is cut off and the new system is turned on at a certain point in time.
a) Parallel
b) Direct
c) Pilot
d) Phased

True/False

41. A business process, such as the credit approval process, accomplishes or produces something of value to the organization.

42. In order to manage a process, the process needs to have outputs that are measurable.

43. Process design is typically mapped and documented using a modeling tool, such as Microsoft Excel.

44. Not only is the development of the process important, the testing is equally as critical.

45. The BPM approach has its roots in just-in-time (JIT), which is the radical redesign of an organization’s business processes.

46. The BPR and JIT approaches were both based on assumptions. And if those assumptions are not met, then they will fail to achieve the great expected results.

47. Many JIT implementations in the U.S. actually increased inventory costs because JIT is based on the assumption that warehousing costs are extremely high, as they were in Japan where JIT was initiated by Toyota.

48. When applying business process reengineering (BPR), managers first attempt to automate or semi-automate an organization’s business processes.

49. An advantage of JIT is that it significantly decreases transportation and ordering costs.

50. In the 1990s, most organizations failed to achieve fundamental business process improvements because they attended a BPR seminar and then made mistakes in the implementation.

51. After decades of reengineering attempts, organizations no longer duplicate processes or perform non-core tasks that should be outsourced.

52. If organizations focus exclusively on automation and cost savings, they might achieve significant operational efficiencies but lose their competitive edge.

53. SOA is a confusing concept, even for practitioners, because SOA is mistakenly described like BPM or the definition is incomprehensible.

54. . An important aspect of SOA is the separation of the service interface (the what) from its implementation (the how).

55. SOA and BPM both focus on creating a more flexible IT architecture and optimizing the way actual work gets done.

56. Web services can connect processes with other systems across the organization, and with business partners. The resulting integrated BPM systems are BPM mashups.

57. The goal of loose coupling of apps is to reduce dependencies between systems to improve flexibility and agility.

58. Project resources must be managed according to the Gantt chart.

59. The SDLC is a structured framework that consists of sequential processes by which information systems are developed.

60. For many organizations, custom software is more expensive than packaged applications. However, if a package does not closely fit the company‘s needs, the savings are often diluted when the information systems staff or consultants must extend the functionality of the purchased packages.

Short Answer

61. A __________ is the smallest unit of work and management accountability that is not split into more detailed steps.

62. __________ are pre-configured, ready-to-go integrations between different business software packages. They streamline information sharing among systems.

63. __________ refers to a broad range of software or services that enable communication or data exchange between applications across networks.

64. __________ testing is important because it determines whether the app meets the original business objectives and vision.

65. Large IT projects, especially ones that involve infrastructure, are developed according to the __________ methodology using several tools.

66. A __________ is a type of bar chart that shows a project schedule.

67. __________ is the growth of the project after the scope has been defined and is a serious issue because it can cause the project to fail.

68. The purpose of the __________ is to recognize which activities are on the critical path so that managers know where to focus their efforts.

69. __________ are information systems professionals who specialize in analyzing and designing information systems.

70. In a __________ conversion, the old system and the new system operate simultaneously for a period of time, which is the most expensive, but also the least risky approach.

Essay

71. Sketch or list the four stages of the business process lifecycle.

72. List and briefly describe the four tests performed on modules that have been installed before going live.

73. Identify the tiers of the Three-tier architecture. Describe or give an example of each tier.

74. List and describe the triple constraints of project management.

75. Select a standard business process, such as payroll. Draw a flowchart of an app for that business process.

Chapter 14 Global Ecology, Ethics, and Social Responsibility

Multiple Choice

1. Carbon footprint refers to the amount of __________ emitted by a particular activity, industry, or value chain.
a) CO
b) CO2
c) CO2 and other GHGs
d) coal and biofuels

2. Carbon footprint is typically measured in __________.
a) metric tonne (ton) carbon dioxide equivalent
b) carbon dioxide equivalent per year
c) GHG
d) carbon monoxide emissions

3. The IT sector is responsible for an estimated __________ of the global carbon footprint as a result of emissions from the energy used to run servers, computers, and other hardware.
a) 0.10 to 0.20 percent
b) 0.50 percent
c) 2 to 3 percent
d) 10 percent

4. The IT sector can cut its carbon footprint cut in half by _____.
a) switching to low emission data centers
b) buying eco-friendly hard drives with considerably reduced power consumption
c) placing data center in cold climates
d) all of the above

5. What is global warming?
a) The buildup of CO2.
b) The upward trend in the Earth atmosphere’s global mean temperature (GMT).
c) The holding of heat within Earth’s atmosphere by certain GHGs that absorb infrared radiation.
d) The sea level rise and melting of polar caps.

6. What is the greenhouse effect?
a) The buildup of CO2.
b) The upward trend in the Earth atmosphere’s global mean temperature (GMT).
c) The holding of heat within Earth’s atmosphere by certain GHGs that absorb infrared radiation.
d) The sea level rise and melting of polar caps.

7. Better use of IT to shift away from energy-intensive work habits and lifestyles to low carbon habits and lifestyles depends on _____.
a) mobile technologies
b) commitment of senior managers
c) government policy, incentives for companies, and active participation of consumers
d) cloud computing

8. In environmental terms, a process or industry is __________ when it uses up natural resources faster than they can be replenished.
a) low carbon
b) unsustainable
c) green
d) renewable

9. The GSMA’s Green Power for Mobile (GPM) program has the goal of helping the mobile industry use renewable energy sources, such as __________ to power over 100,000 off-grid base stations in developing countries by 2012.
a) solar, wind, and sustainable biofuels
b) nuclear and solar
c) hydro, coal and wind
d) diesel and solar

10. MTN Group is the mobile telecom company operating in Africa and the Middle East. MTN has reduced GHG emissions and costs by using __________ to run mobile base stations.
a) diesel
b) soybean biofuel
c) wind energy
d) hydro power

11. Routers, switches, and modems operated by end users have been inefficient power guzzling machines mostly because __________.
a) they are built at the lowest possible cost
b) eco-friendly manufacturing did not exist
c) performance speeds were higher than green ones
d) such machines were more reliable than green ones

12. Why are mobile handsets a threat to the environment?
a) They consume a lot of electric power.
b) They emit infrared radiation.
c) The renewal rates of mobiles tend to be very slow.
d) Millions of phones are disposed of, but recycling practices are very poor.

13. The Internet is composed of huge numbers of power-consuming, heat-generating __________ running 24x7x365 worldwide and __________ that direct data packets over networks to their destination.
a) servers; routers
b) firewalls; switches
c) Web sites; databases
d) proxies; wireless access points

14. Which is not one of the characteristics or challenges associated with green IT?
a) Trying to quantify the cost savings of green IT may be impossible or non-applicable if cloud computing is used because the beneficiary of energy-efficient servers is not the company, but their outsourcer.
b) The Society for Information Management (SIM) surveyed CIOs and IT executives about their top IT and business priorities for 2010. Green IT was their top concern.
c) Green IT is a continuous process and requires long-term operating policies.
d) Green IT initiatives should be described in terms of reducing waste and inefficiency to get management’s attention.

15. Industry standards __________ change. Those standards keep ramping up and will again.
a) EPEAT and ENERGY STAR
b) Green STAR
c) SIM
d) EPA

16. The “Next Generation Data Center” strategy is based on the ability to deliver and support secure IT applications through __________.
a) mobile devices
b) wireless networks
c) green IT
d) virtualization

17. Data center virtualization means that servers are __________.
a) integrated so that they can be shared
b) condensed to increase processing power
c) consolidated so they are more secure
d) distributed to reduce cost

18. As part of RoHS sustainability regulations, EU members agreed that new __________ put on the market cannot contain six banned substances—including lead, mercury, and hexavalent chromium—in quantities exceeding maximum concentration values.
a) automobile parts
b) packaging and building materials
c) electrical and electronic equipment
d) computers

19. Opponents of social media monitoring define it as __________.
a) an unfair advantage or exploitation
b) environmentally harmful
c) spying and intolerable invasions of privacy
d) a business security risk

20. Despite the challenges and lack of clear answers, ethics is important because it has become clear that relying on __________ alone to safeguard the community is insufficient.
a) corporate policy
b) the law
c) audit trails
d) moral behavior

21. Blogging to influence financial markets may be deemed by the FTC or SEC as a(n) __________, particularly when done by the CEO hiding his identity.
a) federal crime
b) invasion of privacy
c) insider trading
d) money laundering

22. IT’s capability to introduce ever-growing amounts of data into our lives can exceed our capacity to keep up with the data, leading to __________.
a) digital divide
b) Net neutrality
c) large carbon footprint
d) information overload

23. Bloomberg BusinessWeek (2008) reported that knowledge workers are distracted __________ at work—answering the phone, checking e-mail, responding to a text, or checking YouTube or Facebook.
a) every three minutes
b) every 15 minutes
c) every hour
d) at least twice a day

24. Which does not describe issues or characteristics of information quality?
a) Information quality is mandated by several legislations.
b) Information quality is a subjective measure of the utility, objectivity, and integrity of gathered information.
c) The most common problem that plagues online information sources is aged or outdated content.
d) Millions of individuals face information quality issues on a daily basis as they try to find information online.

25. Reduction in the total number of employees, reengineering of business processes, and the ability of lower-level employees to perform higher-level jobs may result in __________.
a) an increase in the number of special units
b) increased spans of control
c) centralization of authority
d) flatter organizational hierarchies

26. There is a trend toward __________ because the adaptable IT framework makes it much easier to manage issues of cost, scale and agility.
a) cloud computing
b) social media
c) fluid collaboration
d) service oriented architecture

27. New capabilities that are paving the way for new classes of Web apps include each of the following except:
a) location-awareness
b) online/offline modes
c) green IT
d) social connectivity

28. Which is not one of the trends in the future of IT in organizations?
a) Move into cloud computing
b) The new Web as a turning point
c) Devices become more specialized in the content they deliver
d) Conversation economy

29. As analytics become a commodity, the real differentiators are __________ and the ability to make productive decisions.
a) data quality
b) location-based services
c) social media
d) fluid collaboration

30. Technological and economic forces are prompting fresh approaches to systems development using __________ for competitive advantage.
a) in-house development
b) proprietary apps
c) open source software
d) fourth-generation languages or software

True/False

31. Tackling global warming by reducing emissions of greenhouse gases is high on the list of global challenges.

32. Carbon footprint refers to the amount of infrared, CO2 and other GHGs emitted per day by a computing or mobile device.

33. Global warming is typically measured in MtCO2e, which stands for metric tonne carbon dioxide equivalent.

34. Annual emissions are generally measured in gigatonnes (billions of tonnes) of carbon dioxide equivalent per year (GtCO2e/y).

35. All carbon emissions worldwide make up the global carbon footprint.

36. The IT sector, including computing and telecommunications, is responsible for an estimated 10 percent of the global carbon footprint as a result of emissions from the energy used to run servers, computers, and other hardware.

37. IT can play a significant role in reducing GtCO2e/y in the transportation industries.

38. Innovative IT solutions can provide both a better quality of life and contribute to dramatically reduced emissions. That is, quality of life and reduced emissions do not require a tradeoff.

39. Business associations continue to fight against initiatives to reduce energy consumption and carbon emissions.

40. Warnings from the scientific community point to dangers from the ongoing buildup of CO2 and greenhouse gases mostly from the burning of fossil fuels and forests.

41. The greenhouse effect refers to the holding of heat within Earth’s atmosphere by certain GHGs such as CO2, methane, and nitrous oxide that absorb infrared radiation.

42. Scientists predict that the increased temperature and sea level rise from global warming adversely affect the Earth’s biodiversity.

43. Scientists have determined that we should aim to stabilize the concentration of GHGs in the atmosphere in the range 450 to 550 parts per million (ppm), which is much lower than our present level.

44. The Keeling Curve tracks changes in the concentration of CO2 in the Earth’s atmosphere at a Mauna Loa research station.

45. The Keeling curve has become the symbol of the ever-changing chemistry of the earth’s atmosphere and the associated global warming.

46. In 2008, The Climate Group found that the information and communications technology (ICT) is a minor sector in the struggle to reduce climate warming.

47. Transforming the way people and businesses use IT could reduce annual human-caused global emissions by 15 per cent by 2020.

48. IT sector’s own footprint of 10 per cent of global emissions could decrease by 2020 despite increased demand for smartphones and other hardware, software, and services.

49. IT has the unique ability to monitor and maximize energy efficiency both within and outside of its own industry sector to cut CO2 emissions.

50. From smart meters to smart grids, the Climate Group is working with members and partners, such as Google and Cisco, to build on the enormous potential and economic opportunities of IT in the low carbon economy.

51. The role of IT includes emission reduction and energy savings only in the IT sector itself.

52. “Smart” as in smart buildings means that wasted-energy and materials are minimized; and procurement, manufacturing, distribution, service, and recycling are done in an environmentally friendly manner.

53. Green, whether applied to energy, technology, or consumption of resources in general, refers to the concept of using things at a rate that does not deplete its availability in future generations.

54. Sustainability, the study and practice of eco-friendly computing resources, may be in companies’ best financial interests.

55. Questions about data access and capture, tracking and monitoring, privacy and profiling are examples of IT capabilities that have ethical considerations. And there are no easy or agreed to answers to these dilemmas.

56. Globalization, the Internet, and connectivity have the power to undermine moral responsibility because it becomes relatively easy to ignore the harm that might be done to others.

57. IT decreases span of control, increases productivity, and increases the need for technical experts.

58. The trend toward cloud computing allows any part of the IT to be sourced from the Internet, ultimately offering a more flexible model that aligns better with business objectives.

59. Collaboration across time zones and geographies cannot become a business norm until language and cultural differences are minimized.

60. With IT creating organizations that have the characteristics of elasticity—scalable, infinitely flexible, and adaptive—companies and your job will be defined by IT.

Short Answer

61. __________ refers to the concept of using things at a rate that does not deplete its availability in future generations.

62. __________ technology optimizes the capacity and processing power of servers so that fewer servers are needed to provide the necessary processing power.

63. __________ qualified products use less energy.

64. __________ or virtual work, offers many green benefits, including reducing rush-hour traffic, improving air quality, improving highway safety, and even improving healthcare.

65. __________ may be considered an integral component of social media strategies because it gives marketers the ability to discover public conversations about their brands and, if necessary, respond to posters directly or to their posts.

66. Free speech and __________ collide in a world populated by anonymous critics, vengeful people, those with personal agendas, and malcontents.

67. IT’s capability to introduce ever-growing amounts of data into our lives can exceed our capacity to keep up with the data, leading to __________.

68. The Web is undergoing its most significant overhaul since the emergence of __________, and will emerge as an increasingly attractive enterprise platform.

69. __________ are emerging as a rich source of information about consumer sentiment, preferences and desires.

70. As analytics become a commodity, data and decision quality will provide the real competitive __________ .

Essay

71. List two financial benefits associated with becoming a sustainable company, including green IT.

72. Identify and explain two myths about green IT.

73. What are the benefits of telework to individuals, organizations, and the community/society? Give two benefits to each.

74. Discuss the competing interests and tradeoffs at work when the issue is privacy.

75. Discuss the impacts of IT on each of the following: organizational structure, authority, power, and job content.

BUS 335 Week 11 Quiz – Strayer University New

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Quiz 10 Chapter 14
Student: ___________________________________________________________________________
1. There are several positive, functional outcomes of employee turnover. 
True False

2. Avoidable turnover is that which could have been prevented by actions like a pay raise or a new job assignment. 
True False

3. An employee’s perceived desirability of movement can depend on reasons that have little or nothing to do with the job. 
True False

4. An employee’s overall intention to quit depends on the desirability of leaving, ease of leaving, and alternatives available to the employee. 
True False

5. Employees who have a high intention to quit necessarily end up quitting their jobs. 
True False

6. Desirability of movement is a weak predictor of voluntary employee turnover. 
True False

7. Availability of promotions or transfers may lessen or eliminate any intentions to quit, even though the employee is very dissatisfied with the current job. 
True False

8. Discharge turnover is primarily due to extremely poor person/organization matches. 
True False

9. Downsizing turnover is a reflection of a staffing level mismatch in which the organization actually is, or is projected to be, overstaffed. 
True False

10. Of the three types of employee turnover, discharges are the most prevalent. 
True False

11. The types of employee turnover include ___________. 
A. voluntary
B. discharge
C. downsizing
D. all of the above

12. Discharge turnover is usually due to ___________. 
A. a site or plant closing
B. permanent layoff
C. poor employee performance
D. none of the above

13. Turnover due to organizational downsizing is classified as ______. 
A. voluntary
B. involuntary
C. supplemental
D. it depends on the circumstances of the downsizing

14. The desirability of leaving an organization is often an outgrowth of _________. 
A. poor person/organization match
B. favorable labor market conditions
C. general, transferable KSAOs
D. none of the above

15. An employee’s intention to leave an organization is influenced by __________. 
A. perceived desirability of movement
B. perceived ease of movement
C. alternatives available to the employee
D. all of the above

16. Ease of leaving is greater when ____. 
A. employees are highly embedded
B. employees possess ample employer-specific KSAOs
C. labor markets are loose
D. all of the above

17. Downsizing is typically a reflection of __________. 
A. overstaffing
B. understaffing
C. an appropriate staffing level
D. none of the above

18. Data are seldom available regarding when or where employee turnover is occurring in most organizations. 
True False

19. Research suggests that there are differences between the reasons for turnover that employees provide in exit interviews and the reasons employees provide in anonymous surveys. 
True False

20. Because it is typically very easy to collect and analyze job satisfaction data meaningfully, most organizations make this a cornerstone of their retention strategy. 
True False

21. Exit interviews should be conducted by exiting employee’s immediate supervisor whenever possible. 
True False

22. The interviewee in an exit interview should be told that the comments that he/she makes will be confidential and that only aggregate results will be used by the organization. 
True False

23. Postexit surveys should ask be mailed quite some time after the employee’s last day of work so the individual has sufficient time to reflect on his or her experiences. 
True False

24. Economic costs associated with voluntary turnover include accrued paid time off and temporary coverage. 
True False

25. Material and equipment costs are likely to be the most prevalent in replacement and training costs. 
True False

26. The primary immediate benefit of turnover for employers is hiring inducements. 
True False

27. Compared to discharge turnover, voluntary turnover is usually more costly. 
True False

28. Turnover cost estimates are very precise and accurate in most cases. 
True False

29. Many turnover costs are hidden in the time demands placed on the many employees who must handle the separation, replacement, and training activities. 
True False

30. One potential benefit of employee discharges is the development of improved performance management and disciplinary skills. 
True False

31. Downsizing costs are concentrated in separation costs for permanent reductions in force. 
True False

32. Exit interviews can be used to explain _________ to departing employees. 
A. rehiring rights
B. benefits
C. confidentiality agreements
D. all of the above

33. Which of the following is a suggestion for conducting an appropriate exit interview? 
A. The interviewer should be the employee’s immediate supervisor.
B. There should be an unstructured interview format.
C. The interviewer should prepare for each interview by reviewing the interview format and the interviewee’s personnel file.
D. None of the above

34. Which of the following is a common tool to assess employee reasons for leaving? 
A. Position analysis
B. Job rotation
C. Exit interview
D. Discharge notification

35. Economic separation costs associated with voluntary turnover include ________. 
A. hiring inducements
B. rehiring costs
C. manager’s time
D. more than one of the above

36. Replacement costs associated with voluntary turnover include __________. 
A. HR staff induction costs
B. mentoring
C. severance pay
D. contagion

37. Which of the following is a potential benefit associated with voluntary employee turnover? 
A. lowered replacement costs
B. savings from not replacing an employee
C. vacancy creates an open job that must be staffed
D. all of the above

38. Which of the following makes involuntary turnover potentially more costly than a similar level of voluntary turnover? 
A. Accrued paid time off
B. Possibility of a lawsuit
C. Staffing costs for a new hire
D. Formal training

39. Economic costs associated with downsizing include ___________. 
A. threat to harmonious labor-management relations
B. decreased employee morale
C. higher unemployment insurance premiums
D. difficulty in attracting new employees

40. Which of the following is a potential benefit associated with downsizing? 
A. focus on core businesses, eliminating peripheral ones
B. spreading risk by outsourcing activities to other organizations
C. lower payroll and benefit costs
D. all of the above

41. A recent Society for Human Resource Management (SHRM) survey found that the most effective organizational strategy for retaining employees is the provision of concierge services. 
True False

42. Surveys suggest that HR managers believe that a totally different set of factors lead to turnover compared to regular employees. 
True False

43. To have the power to attract and retain employees, rewards must be unique and unlikely to be offered by competitors. 
True False

44. In general, most employees report that the opportunity for higher compensation is a more powerful predictor of turnover than conflict with supervisors. 
True False

45. Research has shown that the best performers are least likely to quit when an organization either rewards performance with higher compensation or widely communicates its compensation practices; doing both adds little to these independent effects. 
True False

46. Of the factors that influence an employee’s desirability of leaving, job satisfaction is the one that cannot be influenced to a significant degree by organizations. 
True False

47. Providing employees increased autonomy and requiring them to learn a variety of skills increases stress significantly, which leads to greater turnover rates. 
True False

48. One guideline for increasing job satisfaction and retention is to ensure that fairness and justice exist in the workplace. 
True False

49. Employee perceptions of injustice are often rooted in misunderstanding or ignorance of company policies that could be resolved with increased communication. 
True False

50. Employees may not like a supervisor who speaks in a derogatory way towards them, but evidence suggests they seldom actually turnover as a result of these feelings. 
True False

51. Some employees who do not take advantage of work-life balance options resent their coworkers who are more likely to use work-life programs. 
True False

52. Evidence suggests that personality dispositions have little or no impact on employee tendencies to turnover. 
True False

53. Because employees quit companies, not jobs, internal staffing systems are usually seen as a poor substitute for a job at another company. As such, they do little to reduce intentions to leave. 
True False

54. The first strategy for improving employee retention is to _____________. 
A. redesign employee jobs
B. increase pay
C. improve job satisfaction
D. none of the above

55. Guidelines for increasing job satisfaction and retention include ___________. 
A. establish a lag pay policy for all employees
B. link rewards to retention behaviors
C. keeping core operations information secret
D. none of the above

56. Which of the following is an attribute of a high value employee that an organization would want to prevent from leaving? 
A. low training investment
B. strong KSAOs
C. retirement
D. low seniority

57. Which of the following is an attribute of a low value employee that an organization would not want to prevent from leaving? 
A. little intellectual capital
B. high seniority
C. high performance
D. all of the above

58. Research most clearly suggests that when organizations wish to increase retention they need to _____. 
A. provide team-building
B. convince employees that there are few alternatives
C. offer “bundles” of HR practices that complement one another
D. demonstrate executive commitment to outreach

59. Which of the following factors leading to turnover cannot usually be addressed by the organization? 
A. Poor social environment at work
B. Low levels of job satisfaction
C. Employee shocks
D. All of these can be addressed by organizational policy

60. Organizations can use compensation to reduce turnover by _____. 
A. providing deferred compensation
B. giving specific rewards for seniority
C. increasing pay levels to surpass the market
D. all of the above

61. Organizations that link extrinsic rewards to employee performance (i.e. that use incentive compensation plans) find that _____. 
A. turnover of high performers decreases and turnover of low performers increases
B. turnover is increased across the board
C. turnover is decreased across the board
D. turnover rates are largely unaffected

62. Work-life balance programs are an example of _____. 
A. communal distribution
B. intrinsic rewards
C. instrumentality
D. a completely ineffective retention strategy

63. Research on organizational justice suggests that ____. 
A. justice only influences turnover in highly industrialized Western countries
B. communication has little impact on employee attitudes or turnover intentions
C. employees are typically well-informed about organizational policies
D. none of the above

64. To increase the cost of leaving, employers ____. 
A. reduce headcount
B. provide deferred compensation
C. increase workloads
D. provide free stock to employees

65. Performance management systems enable organizations to ensure that an initial person/job match yields an effectively performing employee. 
True False

66. One recommendation for an effective performance appraisal or management system is that appraisal criteria should be job-related, specific, and communicated in advance to the employee. 
True False

67. Performance management systems are used primarily to detect individuals whose performance is unsatisfactory and should be terminated. 
True False

68. Poor task performance is the result of insufficient ability, knowledge, skills, or motivation. 
True False

69. In progressive discipline, termination is seen as a viable early option to avoid having to work through a potentially fruitless cycle of improving a low-ability worker. 
True False

70. Employee termination is the final step in progressive discipline, and ideally it would never be necessary. 
True False

71. As assessment of employee success in reaching goals, ratings of competencies, and suggestions for improvement are all part of _____. 
A. performance planning
B. performance appraisal
C. performance execution
D. progressive discipline

72. Recommendations for the effective design and use of a performance appraisal or management system include that ____________. 
A. evaluations should be in writing
B. the employee should receive timely feedback about the evaluation and an explanation for any outcome decision
C. there should be agreement among different raters in their evaluation of the employee’s performance
D. all of the above

73. ______ includes the completion of job tasks that are specifically included in the job description. 
A. Citizenship
B. Task performance
C. (Low) Counterproductivity
D. All of the above

74. Which of the following is not a part of normal progressive discipline? 
A. Give employees notice of the rules of conduct
B. Provide employees with alternative employment if performance problems persist
C. Allow for full investigation of alleged employee misconduct
D. Give employees the right to appeal a decision

75. Which of the following is an example of a major employee offense? 
A. sabotage
B. theft
C. drug/alcohol abuse at work
D. all of the above

76. The typical penalty for a first major offense by an employee is _____________. 
A. suspension or discharge
B. written reprimand
C. verbal reprimand
D. none of the above

77. Discharge turnover targets groups of employees and is also known as reduction in force. (RIF). 
True False

78. Data shows dramatic decreases in organizational stock price following a downsizing, especially if the downsizing organization restructures assets during downsizing. 
True False

79. Research shows that downsizing has negative impacts on employee morale and health, workgroup creativity and communication, and workforce quality. 
True False

80. No-layoff policies cannot be implemented effectively by organizations. 
True False

81. One problem that has been shown to accompany downsizing is _____. 
A. increased payroll costs
B. decreases in employee health and motivation
C. most companies fail to downsize sufficiently
D. insufficient attention to issues of seniority

82. Which of the following is the most commonly pursued alternative to layoffs for reducing staffing levels? 
A. Attrition
B. Retraining
C. Benefits reductions
D. Job sharing

83. In many cases, the post-layoff environment for those who remain is marked by _____. 
A. reductions in trust of management
B. stress among those who remain
C. reductions in workforce quality
D. all of the above

84. Legal experts usually advise organizations to avoid documenting performance problems because the “paper trail” is likely to just lead to problems in court. 
True False

85. From a legal standpoint, if performance appraisal information is to be used in the retention management and termination process for an organization, the organization needs to ensure that the information is _____. 
A. organizationally relevant
B. sufficiently general to cover a variety of situations
C. communicated in advance to the employee
D. all of the above

BUS 309 Week 11 Quiz – Strayer University New

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Quiz 10 Chapter 11

Job Discrimination

MULTIPLE CHOICE

1. Which of the following is true based on documented evidence of discrimination?
a. African Americans have the third highest standard of living in the world.
b. Today, men are just as likely as women to be in so-called “pink collar” occupations.
c. There is little statistical evidence of job discrimination today.
d. Relatively few women and minorities have made it to the very top of their professions.

2. A historical view indicates which of the following is correct?
a. Statistical evidence is irrelevant to proving discrimination.
b. Women and blacks are sometimes victimized by stereotypes.
c. The idea that women may have difficulties fitting into a “male” work environment is outdated.
d. On average women earn between 1/3 and 1/2 of what men make for doing the very same work.

3. Which of these statements is true concerning court cases about discrimination?
a. Brown v. Board of Education upheld the principle of “separate but equal.”
b. The Bakke case outlawed affirmative action across the board.
c. In the 2004 Holtz case, the Supreme Court ruled that “race-conscious” admissions policies are unconstitutional.
d. In the recent University of Michigan cases (Gratz and Grutter), the Supreme Court upheld a moderate, flexible affirmative action program and rejected a rigid one.

4. Of these four arguments, which of the following is the most plausible argument FOR affirmative action?
a. It evens the score with young white men, who have had it good for too long.
b. It is necessary to break the cycle that keeps minorities and women locked into low-paying, low-prestige jobs.
c. It ignores the principle of equality.
d. It is a color-blind policy.

5. Of these four arguments, which of the following is the most plausible argument AGAINST affirmative action?
a. Compensatory justice forbids affirmative action.
b. Blacks and whites are already equal in socioeconomic terms.
c. Affirmative action violates the rights of white men to equal treatment.
d. Affirmative action is the same thing as fixed numerical quotas.

6. Advocates of “comparable worth”
a. say that all women do their job just as well as men.
b. base their doctrine on the free-market determination of wages.
c. believe it is necessary for getting rid of sexual harassment.
d. want women to be paid as much as men for jobs involving equivalent skill, effort, and responsibility.

7. Which of the following is an example of sexual harassment?
a. Unwelcome sexual offers a female employer gives to a male employee.
b. A female employee hugging a co-worker when he announces his engagement.
c. A manager enforcing a dress code for a work environment.
d. An employee pinning up comic strips in an office cubicle.

8. Sexual comments that one woman appreciates might distress another women. Who decides when such behavior is inappropriate?
a. The person to whom the comments are directed.
b. The person accused of harassment.
c. The hypothetical “reasonable person.”
d. The common law as modified by legislation.

9. The 1984 Supreme Court decision in Memphis Firefighters v. Stotts
a. treated sexual harassment as a form of discrimination.
b. upheld seniority over affirmative action.
c. upheld the legality of hiring quotas.
d. upheld the legality of mandatory drug testing.

10. In 1987, the Supreme Court affirmed, in the case of Johnson v. Transportation Agency, that
a. affirmative action is unconstitutional.
b. quotas based on considerations of race are unconstitutional.
c. considerations of sex are permissible as one factor in deciding whom to promote.
d. racially segregated schooling is unconstitutional.

11. Which of the following statements is accurate?
a. Men cannot be victims of sexual harassment.
b. The Supreme Court has established a hard and fast line between permissible and impermissible affirmative action plans.
c. The law treats sexual harassment as a form of sexual discrimination.
d. Differences in levels and types of education explain why, on the average, men earn more than women.

12. When investigators sent equally qualified young white and black men—all of them articulate and conventionally dressed—to apply for entry-level jobs in Chicago and Washington, D.C., the results clearly showed
a. sexual discrimination against young African-American men.
b. racial discrimination against young African-American men.
c. sexual discrimination against young white men.
d. racial discrimination against young white men.

13. What quality is more important in predicting who gets fired than job-performance ratings or even prior disciplinary history?
a. race b. sexual orientation c. age d. gender

14. Male managers frequently assume that women
a. will not place family demands above work considerations.
b. possess the necessary drive to succeed in business.
c. take negative feedback professionally rather than personally.
d. are too emotional to be good managers.

15. What do affirmative action programs involve?
a. Firms should prepare an oral equal-employment policy and an affirmative action commitment.
b. Firms should appoint an administrative assistant to direct and implement their program and to publicize their policy and affirmative action commitment.
c. Firms are expected to survey current
female and minority employment by department and job classification.
d. Whenever underrepresentation of females or minorities is evident, firms are to try a little harder.

16. Fill in the blank. Today most large corporations not only accept the necessity of affirmative action but also find that _______________ benefits when they make themselves more diverse?
a. the morale of the company c. the law department
b. the bottom line d. the managers

17. Many Americans oppose what issue because they fear it will lead to illegal quotas, preferential treatment of African Americans and women, and even reverse discrimination against white men?
a. affirmative action c. sexual harassment
b. sexual diversity d. age discrimination

18. Over the last two decades, how many sexual-harassment claims have emerged?
a. over 12,000 annually. c. over 25,000 annually.
b. over 15,000 annually. d. over 50,000 annually.

19. There are two legal types of sexual harassment:
a. male to female, female to male.
b. male to male, female to female.
c. boss to worker, worker to boss.
d. “quid pro quo’’ and “hostile work environment.’’

20. To answer the question of who determines what is objectionable or offensive in sexual harassment, the courts use what kind of hypothetical person?
a. reasonable person c. hysterical person
b. sensual person d. management person

21. One message that sexual harassment conveys is that managers view women as
a. assets. b. equals. c. high potentials. d. playthings.

22. What should a female employee do if she encounters sexual harassment?
a. She must decide if she likes the attention.
b. She should try to document it by keeping a record of what has occurred, who was involved, and when it happened.
c. Keep it to herself and never tell a soul.
d. Go on a talk show and tell her story.

23. According to Shaw and Barry, companies clearly have what kind of obligation to provide a work environment in which employees are free from sexual harassment?
a. legal b. moral c. environmental d. personal

24. Opponents of comparable worth insist which one of these ideas support their position?
a. Most women want a rigid schedule.
b. Most women want the most challenging job.
c. Most women have chosen the higher paying occupations.
d. Most women have freely chosen the lower paying occupations.

25. Affirmative action, comparable worth, and sexual harassment are connected to
a. job performance. b. job discrimination. c. job analysis. d. job description.

TRUE/FALSE

1. The Civil Rights Act of 1964 prohibits discrimination based on race, color, sex, religion, or national origin.

2. Experts distinguish two types of sexual harassment. “Hostile work environment” is one of them.

3. The Supreme Court has ruled that sexual favoritism is a form of sexual harassment and is therefore illegal.

4. To discriminate in employment is to make an adverse decision against an employee or job applicant based solely on his or her membership in a certain class.

5. The Supreme Court, in its 1978 ruling in the case of Bakke v. Regents of the University of California, upheld the University’s right to reserve entrance places in its medical school for minorities.

6. The terms “affirmative action” and “reverse discrimination” are synonymous.

7. Kantians would repudiate sexual or racial job discrimination as disrespectful to our humanity.

8. Title VII of the Civil Rights Act of 1964 allowed sexual and racial discrimination at work until overturned by the Supreme Court.

9. “Affirmative action” refers to programs taking the race and sex of employees and job candidates into account as part of an effort to correct imbalances in employment that exist as a result of past discrimination, either in the company itself or in the larger society.

10. The issue of comparable worth pits against each other two cherished American values: the ethic of nondiscrimination verses the free enterprise system.

11. The only true form of job discrimination is intentional and individual.

12. Catherine A. MacKinnon describes sexual harassment as sexual attention imposed on someone who is not in a position to refuse it.

13. An isolated or occasional remark or innuendo inevitably constitutes sexual harassment.

14. According to the Supreme Court, men cannot be the victims of sexual harassment.

15. The courts view sexual harassment as a kind of sexual discrimination.

16. The 1995 case Adarand Constructors v. Pena shows that, after years of disagreement, the Supreme Court is now unanimous on the issue of affirmative action.

17. Job discrimination involves prejudice, inaccurate stereotypes, or the assumption that a certain group is inferior and deserves unequal treatment.

18. Some companies view diversity in the workplace as a competitive advantage.

19. The Civil Rights Act of 1964 applies to all employers, both public and private, with twenty five or more employees.

20. Executive Order 10925 decreed that federal contractors should “make rigid quotas to ensure that applicants are employed without regard to their race, creed, color, or national origin.’’

21. Women entering male turf, or minority workers of either sex going into a predominantly white work environment, can find themselves uncomfortably being measured by a white male value system.

22. Statistics by themselves do not prove discrimination.

23. A survey shows that three out of four whites believe that African Americans and Hispanics are more likely than whites to prefer living on welfare, and a majority of whites also believe that African Americans and Hispanics are more likely to be lazy, unpatriotic, and prone to violence.

24. Anti-discrimination laws do not address the present-day effects of past discrimination.

25. The Civil Rights Act of 1964 (later amended by the Equal Employment Opportunity Act of 1972) prohibits all forms of discrimination based on race, color, sex, religion, or national origin.

SHORT ANSWER

1. Job discrimination occurs if three conditions are met. What are they?

2. Job discrimination can be individual or intentional. What are two other forms that job discrimination can take?

3. What is some of the statistical evidence of job discrimination?

4. What is some of the attitudinal evidence of job discrimination?

5. What did the Supreme Court decide in 1954 in the case of Brown v. Board of Education?

6. What does Title VII of the 1964 Civil Rights Act say?

7. EEOC lists steps to affirmative action. Name two of them.

8. Explain the importance of the 1978 case, Bakke v. Regents of the University of California.

9. What is the Supreme Court’s current view of affirmative action (as evidenced by the Michigan cases Gratz and Grutter)?

10. Affirmative action should be distinguished from reverse discrimination. What is the difference?

11. What is the doctrine of comparable worth? On what grounds do opponents of comparable worth criticize it?

12. What evidence do we have that sexual harassment is harmful to people?

13. What is an example of strong evidence that racial or sexual discrimination exists?

14. What steps should a male or female employee take when encountering sexual harassment?

ESSAY

1. Explain in your own words the pros and cons of the against affirmative action that “affirmative action injures white men and violates their rights.”

2. Explain why sexual harassment is unethical considering two moral theories.

3. Explain why job discrimination is unethical considering two moral theories.

4. Is it unrealistic to imagine that there will be no sexual interaction between men and women in the workplace? Produce the reasoning on both sides of the argument.

5. Should the sexual orientation of gays and lesbians be protected against discrimination? Justify your answer.

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Quiz Chapter 16 and 17

Other Supply Responsibilities

113. Investment recovery is often assigned to:

a. supply managers because they have knowledge supply markets and price trends.
b. salespeople because they have contact with buyers who may use the material.
c. marketing managers because they have information on internal users.
d. engineers who can suggest possible uses of the material within the organization.
e. financial analysts because they set the target return on all investments.

114. Efforts to deal with hazardous waste include a focus on:

a. highly visible sources of pollution, e.g. smoke stacks.
b. less visible uncontrolled sites, e.g. buried waste.
c. recycling.
d. substitution of non-hazardous materials for hazardous materials.
e. all of the above.
115. The potential benefits of having accounts payable report to the same executive as supply include:

a. familiarity with the supplier
b. familiarity with the order.
c. opportunities to reduce transaction costs and headcount.
d. the ability for supply to ensure that payments for suppliers are made on time.
e. all of the above.

116. Reducing the obsolescence and waste of maintenance, repair, and operating (MRO) supplies through better materials and inventory management will:

a. reduce the costs of disposing of MRO items that are obsolete or waste.
b. reduce carrying cost by lowering inventory levels, especially of obsolete items.
c. improve environmental performance by reducing waste that goes into landfills or incinerators.
d. simultaneously reduce costs and improve environmental performance.
e. have little impact because MRO is a small percentage of annual spend and the items usually have low environmental low-impact.

117. Warehousing and inventory storage:

a. can either be an internal function or outsourced to a third-party logistics firm.
b. typically has little communication with supply management.
c. may have direct responsibility for organizational purchasing decisions.
d. outsourcing decisions typically are made by the finance department.
e. is seldom outsourced.

118. One of the reasons why companies are paying more attention to the effective, efficient, and profitable recovery and disposal of scrap, surplus, obsolete, and waste materials is that:

a. consumers overwhelmingly demand environmental responsibility.
b. it is easy to administer and highly profitable.
c. most organizations generate little scrap, surplus, obsolete and waste materials.
d. disposal costs are rising and environmental legislation is strengthening.
e. disposal is a fairly simple problem that is easily resolved.

119. The role and importance of investment recovery in an organization is driven in large part by the:

a. CEO’s perspective on environmental issues.
b. Chief Purchasing Officer’s clout or leverage with other executives.
c. projected dollar value of the potential revenue recovery or cost reduction.
d. salespeople who encourage the inclusion of buy-back programs of key materials.
e. internal level of knowledge about disposal channels and suppliers.

120. Coordinating inbound and outbound transportation:

a. has little application in an effective and efficient supply organization.
b. is done by cross-functional teams in most organizations.
c. helps to reduce costs and improve utilization of related assets and resources.
d. provides the basic elements of a global supply network.
e. is used extensively in Europe, but has not migrated to the U.S.

121. Production planning:

a. focuses on long-term schedules to control inventory and production.
b. requires coordinating the delivery and storage of key raw materials.
c. cannot involve supply because of fears of undue influence from suppliers.
d. relies heavily on forecasts from purchasing and supply management.
e. is a discrete activity with little coordination with other functions.

122. Supply can contribute to the organization’s environmental management program by:

a. developing sourcing and usage alternatives for hazardous materials.
b. focusing on substitution of non-hazardous materials for hazardous materials.
c. encouraging and participating in designing products that do not use or generate hazardous waste.
d. a and b.
e. a, b and c.

True and False

1. Production planning relies heavily on forecasts from operations to anticipate demand for products and services..

2. To ensure maximum return for its investment, the process and procedures for selling scrap and surplus must cover a broad range of activities including segregation and storage, weighing and measuring, delivery, negotiation, supplier selection, and payment.

3. If material has been declared surplus, the only option is to sell it.

4. Obsolete is in the eyes of the beholder. Something that has been declared obsolete in one organization may be perfectly acceptable and useable in another.

5. It makes no sense to assign responsibility for disposal to the supply management function because the personnel usually have no selling experience.

6. The total cost of hazardous waste for a company does not include the costs of new plant and equipment to reduce waste and deal with contaminated plants.

7. Escalator clauses in contracts for scrap disposal are necessary because the prices of primary metals fluctuate.
8. An organization’s Enterprise Resource Planning (ERP) system may be used to develop a national or global database for company personnel at different locations to post and purchase spare parts, obsolete materials, and surplus.

9. Waste is created when a change in the production process occurs, or when a better material is substituted for the material originally used.

10. As more people come to believe that it makes economic sense to practice environmentally sound operations, business and government may be able to work together for common goals.

CHAPTER 17

SUPPLY FUNCTION EVALUATION AND TRENDS

123. Research on the supply management process focuses on:

a. developing a strategy to reduce cost or ensure supply.
b. improving buyer-seller relationships.
c. deciding whether to single or multiple source.
d. conducting cost analysis to identify unnecessary costs.
e. increasing efficiency by automating where possible.

124. Purchasing performance benchmarking attempts to:

a. analyze a firm’s own internal trends.
b. provide industrywide standards for overall firm performance.
c. determine what results have been achieved by purchasing and supply activities.
d. determine how an organization achieves results in purchasing and supply.
e. provide baseline metrics to compare companies’ supply performance.

125. The budget which begins with an estimate of expected operations, based on sales forecasts and plans, is called the:

a. operating budget.
b. capital budget.
c. cash flow budget.
d. materials purchase budget.
e. organizational budget.

126. When cross-functional teams are used to conduct research, it is best if:

a. the team has strong leadership.
b. the team has total autonomy to decide objectives and set expectations.
c. team members are randomly selected from departments.
d. performance evaluation and reward systems foster individual contributions.
e. each team member develops time management skills to handle the assignment.

127. In terms of measuring and validating supply savings:

1. information systems easily capture savings.
2. static markets, technologies, and volumes facilitate the process.
3. in many cases there is an inability to convert savings into profit.
4. management usually recognizes cumulative savings.
5. there is a universal definition of supply savings.

128. Supply can play a leadership role in corporate social responsibility (CSR) by:

1. instituting third party workplace audits of suppliers in developing countries.
2. knowing the providence of products in the supply chain.
3. considering the organization’s carbon footprint in supply decisions.
4. designing closed loop supply chains.
5. all of the above.

129. The assessment of a supplier’s financial capacity:

1. enables the development of risk minimization strategies.
2. predicts the probability of the supplier encountering financial problems.
3. is done primarily to ensure the supplier has the cash to pay its bills.
4. usually is unnecessary if the supplier has been in business for more than 5 years.
5. is required before a contract can be ratified.

130. A comprehensive commodity study should result in a(n):

a. thorough analysis of sources used over time.
b. strategy to lower cost and assure supply.
c. review of past predictions and variances from actual prices paid.
d. assessment of the performance of the commodity manager.
e. trend analysis of volume requirements over time.

131. Trends in supply organization and leadership include:

a. more chief purchasing officers with extensive supply experience.
b. less emphasis on teams.
c. global projects requiring cross-cultural skills.
d. merging of strategic and tactical roles in supply.
e. emphasis on “hard skills” such as finance.

132. An efficiency-oriented performance metric:

a. evaluates the quality of supplier relationships.
b. measures end customer satisfaction.
c. measures direct contributions to profit.
d. calculates the average dollar cost of a purchase order.
e. measures number of defects caused by poor incoming quality.

True and False

1. The perceptions that non-supply managers have of supply are shaped by interactions with and observations of supply, tangible experiences with supply on a day-to-day basis, and the extent to which supply is seen as contributing to the firm’s mission.

2. Value engineering is done on purchased items used in the ongoing production process, while value analysis is done in the design stage where items are being specified.

3.Triple bottom line reporting refers to an organization’s social, environmental, and financial performance.

4. Effectiveness metrics which emphasize price may lead to behavior that drives up total cost of ownership.

5. The supply planning process is initiated by the supply manager’s assessment of the supply base.

6. Industry benchmarking allows an individual company to compare itself to its major competitor.

7. Financial efficiency is indicated by the asset and inventory turnover ratios.

8. Supplier performance management systems should be designed to capture and communicate the failures of suppliers so penalties can be assessed.

9. Supply management’s contribution may be measured along three dimensions: revenue enhancement, asset management, and cost management.

10. Internal validation of supply’s financial contribution increases joint ownership of goals and outcomes.

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Chapter 6 Through 15

Part 1: Chapter 6 Through 10
Part 2: Chapter 11 Through 15

Governmental Activities – Accounting for Capital Projects and Debt Service

TRUE/FALSE (CHAPTER 6)

1. The resources to service all long-term debts of the governmental entity are typically accounted for in debt service funds.

2. When governments establish capital projects funds, they may choose to maintain a separate fund for each major project, or they may choose to combine two or more projects in a single fund.

3. GASB Statement No. 34 does not require a budgetary comparison statement for capital projects funds as it does for the general fund and for each major special revenue fund that has a legally adopted annual budget.

4. Capital projects funds do not report long-term obligations in the fund.

5. When bonds are issued at a premium, the capital projects fund can transfer those excess resources to the debt service fund.

6. When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

7. In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be accumulated in a long-term asset account.

8. Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt—that is, long-term debt associated primarily with governmental activities.

9. In contrast to the accounting for debt service fund expenditures, the interest revenue on bonds held as investments should be accrued in the period the revenue is earned.

10. Special assessments are imposed nonexchange transactions, similar to property tax levies.

11. The interest paid on debt issued for public purposes by state and local governments is generally subject to federal taxation.

12. Nongovernmental not-for-profits must account for defeasances differently than governments.

MULTIPLE CHOICE (CHAPTER 6)

1. The capital project fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

2. In which fund type would a governmental entity’s capital project fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

3. The debt service fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

4. In which fund type would a governmental entity’s debt service fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

5. With regard to the resources dedicated to the acquisition of fixed assets which will be used in general government activities, which of the following is true?
a) Governments must maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
b) Governments may maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
c) Governments may account for any resources dedicated (whether legally or not) to the acquisition of fixed assets in any of the governmental funds.
d) Government must account for all resources set aside for fixed asset acquisition in a capital project fund.

6. Salt City issued $5 billion of bonds at face value to fund the reconstruction of the major interstate highways in and around their city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the City. Assuming the City maintains its books and records in a manner that facilitates the preparation of fund financial statement, how would the underwriting fee be accounted for in the capital project fund?
a) Reduce Other financing sources $2 million.
b) Reduce Bonds payable $2 million.
c) Increase Expenditures $2 million.
d) It would not be accounted for in the capital project fund.

7. Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5% and were sold at 101. Which of the following entries should be made in the Capital Project Fund to record this event?
a) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Premium on Bonds Payable $.02 million.
b) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Other Financing Sources $.02 million.
c) Debit Cash $2.02 million; Credit Other Financing Sources $2.02 million.
d) Debit Cash $2.02 million; Credit Other Financing Sources $2 million and Revenue $.02 million.

Use the following information to answer questions # 8 and #9
Voters in Lincoln School District approved the construction of a new high school and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. Bids were received and the low bid was $10 million. When the bonds were issued, they sold for face value less bond underwriting fees of $.5 million. The School Board voted to fund the balance of the construction by a transfer from the general fund.

8. The entry in the capital project fund to record the receipt of the bond proceeds would be
a) Debit Cash $9.5 million; Credit Bonds Payable $9.5.
b) Debit Cash $9.5 million; Credit Other Financing Sources $9.5.
c) Debit Cash $9.5 million and Expenditures $.5 million; Credit Bonds Payable $10 million.
d) Debit Cash $9.5 million and Expenditures $.5 million; Credit Other Financing Sources $10.

9. The entry in the capital project fund to record the additional funding for the construction would be
a) Debit Due from General Fund $.5 million; Credit Other financing Sources $.5 million.
b) Debit Due from General Fund $.5 million; Credit Revenue $.5 million.
c) Debit Cash $.5 million; Credit Due to General Fund $.5 million.
d) Debit Other Financing Sources $.5 million; Credit Due to General Fund $.5 million.

Use the following information to answer questions #10 and #11
Voters in Phillips City approved the construction of a new $10 million city hall building and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium?

10. In the capital project fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources $100,000; No other entries required.
c) Debit Cash $100,000; Credit Revenues; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000
d) Debit Cash $100,000; Credit Other Financing Sources—$100,000; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000

11. In the debt service fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources—Nonreciprocal Transfer $100,000; No other entries required.
c) Other Financing Sources—Nonreciprocal Transfer $100,000; credit Cash $100,000.
d) No entry in the Debt Service Fund

12. Sister City was notified by the State that they had been awarded a $6 million grant to aid in the construction of a senior citizens center. At the time of the notification what is the appropriate entry in the capital project fund (assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements)?
a) No entry at the time of the notification
b) Debit Grants Receivable $6 million; Credit Revenue $6 million
c) Debit Grants Receivable $6 million; Credit Deferred Revenue $6 million.
d) Debit Grants Receivable $6 million; credit Other Financing Sources—Nonreciprocal Transfer $6 million.

13. Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives a progress billing from the contractor?
a) Debit Building; Credit Cash
b) Debit Building; Credit Accounts Payable.
c) Debit Expenditure; Credit Accounts Payable
d) No entry is required.

14. Previously Atomic City had issued bonds with a face value of $10 million to construct a new city hall. Because the money will not be needed for several months, the city invested the bond proceeds in U.S. Government securities. Assuming that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives interest on the investments?
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Source
c) Debit Cash; Credit Deferred Revenue
d) No entry required.

15. A City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?
a) General Fund.
b) Special Revenue Fund.
c) Capital Project Fund.
d) Debt Service Fund.

16. Use of a Debt Service Fund is required
a) When financial resources are being accumulated for the purpose of paying for capital asset acquisition.
b) When financial resources are being accumulated for the purpose of paying principal and interest when it matures.
c) For all bonded debt service payments.
d) For all debt service payments.

17. Six years ago Hill City issued $10 million of 6% term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1. Hill City has a September 30 fiscal year end. The amount of interest payable that would be included on the balance sheet for the debt service fund of Hill City at September 30 would be
a) $ -0-
b) $150,000
c) $300,000
d) $600,000

18. Sue City has outstanding $5 million in general term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end. Interest at 6% is payable each January 1 and July 1. The principal of the bonds is due 10 years in the future. The City budgeted the July 1, 1999 interest payment in the budget for the fiscal year ended June 30, 1999. On June 30, cash was transferred from the General Fund to the Debt Service Fund to make the required payment. The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 would be
a) $ -0-
b) $150,000.
c) $300,000.
d) $3,000,00.

Use the following information to answer questions #19 and #20
Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

19. When the County makes the transfer the entry in the debt service fund should be
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Sources.
c) Debit Cash; Credit Interest Payable.
d) Debit Cash with Fiscal Agent; Credit Other Financing Sources.

20. In the debt service fund, what is the appropriate entry when the principal payment is made?
a) Debit Bonds Payable; Credit Cash.
b) Debit Expenditures; Credit Cash.
c) Debit Other Financing Uses—Nonreciprocal Transfer; Credit Cash.
d) No entry is required.

Use the following information to answer questions #21 and #22.
The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to tax themselves for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. The City does not guarantee the debt nor does it assume any legal or moral obligation for the bonds.

21. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

22. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

Use the following information to answer questions #23 – #25.

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special tax on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special tax is not sufficient to make the principal and interest payments, the City will assume the obligations.

23. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

24. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

25. When the City of Arlington levies the special assessment tax, the best entry would be
a) Debit Taxes Receivable; Credit Revenues.
b) Debit Taxes Receivable; Credit Deferred Revenues.
c) Debit Taxes Receivable; Credit Liability.
d) Debit Taxes Receivable; Credit Fund Balance.

26. Adams County has outstanding $10 million in bonds issued by the County to construct a sewer system in a specific area of the county. The taxpayers in that area voted for the construction and the bonds and agreed to tax themselves to pay the principal and interest on the bonds. The County contracted for the construction and issued the bonds but the City assumed no legal or moral obligation for the bonds. If the special tax payments are not sufficient to make the required principal and interest payments, the County will not make up the difference. The $10 million of bonds should appear in which fund financial statements or schedule?
a) Capital Project Fund.
b) Special Assessment Fund.
c) Schedule of Long-term Obligations.
d) The bonds need not appear on the face of the financial statements of Adams County.

27. Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%. After paying the interest on the tax-exempt bonds, the City cleared 1%. This is an example of
a) An illegal act.
b) Poor fiscal management.
c) Arbitrage.
d) Debt refunding.

28. The City of St. Joe had outstanding $5 million of 6% bonds with a call provision. Due to changes in the prevailing interest rates, the City issued new bonds at 4.5% and used the proceeds to call the 6% bonds. This is an example of
a) Debt retirement.
b) Debt refunding.
c) In-substance defeasance.
d) Economic defeasance.

29. A governmental entity has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so. There is, however, an ‘accounting loss’ associated with these events. An accounting loss is defined as
a) The present value of the principal and interest payments on the new debt less the present value of the principal and interest payments on the old debt.
b) The present value of the principal and interest payments on the old debt less the present value of the principal and interest payments on the new debt.
c) The cash paid to redeem the old debt less the book value of the old debt.
d) The face value of the new debt less the cash paid to redeem the old debt.

30. The City of Williamsburg decided to defease old 6% bonds carried in its Electric Enterprise Fund with new 4.5% bonds. As a result of the defeasance, the City incurred an accounting loss. This loss should be recognized
a) As an adjustment to retained earnings since it is applicable to prior periods.
b) In the year of the defeasance.
c) Over the remaining life of the old bonds or the new bonds, whichever is shorter.
d) It should not be recognized.

PROBLEMS (CHAPTER 6)

1. The voters of Salt Lake City authorized the construction of a new north-south expressway for a total cost of no more that $75 million. The voters also approved the issuance of $50 million of 5% general obligation bonds. The balance of the necessary funds will come from the following sources: $15 million from a federal grant and $10 million from a state grant. The City controls expenditures in capital project funds through project management The City does not formally incorporate budgetary entries in the capital project fund but it does use encumbrance accounting for control purposes. REQUIRED: Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Capital Project Fund, for the following transactions.

(a) The City issued $50 million of 5% general obligation bonds at 101.

(b) The City transferred the premium to the appropriate fund.

(c) The City incurred bid-related expenditures of $1,000.

(d) The City signed a contract with the lowest competent bidder for $48 million.

(e) The city received notice from the State that the grant had been approved and the proceeds will be forwarded to the City in the State’s current fiscal year.

(f) The City received the federal grant in full.

(g) The City received a progress billing from the contractor for $10 million. The City pays the billing.

2. The City of Eugene has the following balances in the accounts of its capital project fund at year-end. All accounts have normal balances. All amounts are in millions of dollars.
REQUIRED: (a) Prepare an operating statement for the capital project fund.
(b) Prepare a Balance Sheet for the capital project fund.

Cash $ 68
Deferred Revenue $ 5
Expenditures $ 10
Fund Balance—Unreserved $ 14
Grants Receivable $ 10
Other Financing Sources $ 50
Other Financing Uses $ 1
Revenues $ 20

3. In 1999, the voters of Southside City authorized the construction of a new swimming pool for a total cost of no more that $5 million. The voters also approved the issuance of $5 million of 5% general obligation serial bonds to be repaid by a special property tax . Interest on these bonds is payable annually on June 30. On June 30, 1999, the City sold the bonds at 101 and signed contracts for the construction of the swimming pool. Each June 30, beginning in 2000, $250,000 of the bonds mature. If the property tax is not sufficient to make the necessary principal and interest payments the City is obligated to transfer the necessary monies from the general fund to the debt service fund. The City does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The City has a June 30 fiscal year end.
REQUIRED: Assuming the City maintains it books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Debt Service Fund, for the following transactions.

(a) The City immediately transferred the premium to the Debt Service Fund. The Debt Service Fund may not use the premium to pay principal or interest until the year 2019.

(b) On June 30, Southside City invests the premium in a 10-year 5% Certificate of Deposit at a local financial institution. The Certificate pays interest annually on June 30. The interest is automatically reinvested in the Certificate.

(c) Property taxes in the amount of $300,000 were collected by June 30, 2000. Another $50,000 is expected to be collected by August 31.

(d) The city transferred, to the debt service fund, the cash necessary to make the June 30, 2000 payments. The checks will be mailed on July 1.

(e) The city recognized the interest earned on the Certificate of Deposit.

(f) The city recognizes the appropriate liabilities in the debt service fund.

ESSAYS (CHAPTER 6)

1. The citizens of a defined geographical area of the City of Sale authorized a special assessment to be levied on their property to finance the reconstruction of the sewer system infrastructure that serves the area. The City will solicit bids, oversee reconstruction, issue the debt in the name of the City, and service the debt. The City does not guarantee the debt but the City will collect the special assessments and make principal and interest payments to the bondholders. Discuss the appropriate accounting for the construction phase and the debt service phase of this project. Justify the required accounting and financial reporting for these two phases of this project.

2. What is arbitrage? What are its potential uses and/or abuses? How are potential abuses regulated?

Chapter 7

Governmental Activities – Capital Assets and Investments in Marketable Securities

TRUE/FALSE (CHAPTER 7)

1. General capital assets are distinguished from the capital assets of proprietary funds and fiduciary funds.

2. General capital assets are excluded from governmental funds, themselves, because of the funds measurement focus (current financial resources).

3. In governmental funds, the capital asset costs are reported as expenses when the assets are acquired.

4. At the government-wide level, governments must depreciate inexhaustible assets, such as land, works of art, or historical treasures.

5. Governments do not have to depreciate infrastructure assets if they can demonstrate they are preserving them in a specified condition.

6. Unlike businesses, governments should not capitalize interest on general capital assets that they construct themselves.

7. Most infrastructure assets are the responsibility of the federal government, not state and local governments.

8. Prior to the issuance of GASB Statement No. 34, state and local governments provided virtually no information as to most of their infrastructure.

9. Governments invest in marketable securities for much the same reason that businesses do—to earn a return on cash that would otherwise be unproductive.

10. Governments are prohibited from entering into reverse repurchase agreements.

MULTIPLE CHOICE (CHAPTER 7)

1. The objectives of financial reporting for fixed assets should be to provide information
a) About a governmental entity’s physical resources.
b) That can be used to assess the service potential of a governmental entity’s physical resources.
c) To help users assess a government’s long- and short-term capital needs.
d) All of the above.

2. A governmental entity may record long-term assets in which of the following funds or account groups?
a) General Fund
b) Internal Service Fund.
c) Capital Project Fund
d) Debt Service Fund.

3. General fixed assets are excluded from governmental funds because
a) The measurement focus of governmental funds is on current financial resources.
b) They are not used to generate revenues.
c) The basis of accounting is accrual.
d) None of the above.

4. The City of Shiloh sold a used police car. The police car, which had a historical cost of $17,000 and a fair value of $12,000, was sold for $5,000. Assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements, what is the appropriate entry in the General Fund to record this sale?
a) Debit Cash $5,000; Credit Revenue $5,000.
b) Debit Cash $5,000 and Loss on Sale $7,000; Credit Automotive Equipment $12,000.
c) Debit Cash $5,000; Credit Other Financing Sources—Sale of Asset $5,000.
d) Debit Cash $5,000; Credit Automotive Equipment $5,000.

5. Which of the following costs will be included in the cost of land on the government-wide financial statements?
a) Purchase price (invoice amount).
b) Cost of demolishing existing structures that cannot be used.
c) Closing costs.
d) All of the above.

6. Donated assets are reported at
a) Historical cost to the donor.
b) Book value in the hands of the donor.
c) Fair value on date of donation.
d) Zero value because they were not purchased.

7. To elect not to capitalize works of art and similar assets, a government must see that the assets meet all of the following criteria except:
a) The assets must be held for public exhibition, education, or research in furtherance of public service, rather than for financial gain.
b) The assets must be protected, kept unencumbered, cared for and preserved.
c) The assets must be subject to an organizational policy that requires the proceeds form sales of the collection items be used to acquire very similar items for the collection.
d) The assets must be subject to an organizational policy that requires the proceeds from sales of the collection items be used to acquire other items for the collection.

8. If a government capitalizes works of art and similar assets, which of the following statements is true relative to depreciation on the works of art and similar assets?
a) Donated assets cannot be depreciated.
b) All works of art must be depreciation, not just exhaustible.
c) All exhaustible assets must be depreciated.
d) The government may elect to omit all depreciation.

9. Which of the following is NOT an infrastructure asset?
a) Roads.
b) Sidewalks.
c) Buildings.
d) Bridges.

10. If a government receives a donation of a work of art, the government must recognize revenue
a) Only if it elects to capitalize its collection.
b) Only if it elects NOT to capitalize its collection.
c) On all donations of works of art.
d) It cannot recognize revenue from donations.

11. For a government that elects NOT to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense, Credit Revenue.

12. For a government that elects to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense/Expenditure, Credit Revenues.

13. GASB standards require that depreciation be reported on all capital assets except
a) Infrastructure accounted for on the standard approach.
b) Infrastructure assets accounted for on the modified approach.
c) Donated assets.
d) Capitalized works of art.

14. With regard to capitalization of infrastructure, which of the following is true?
a) All infrastructure must be capitalized on the financial statement before GASB Statement No. 34 can be implemented.
b) Only large governments must capitalize all infrastructure on the date they implement GASB Statement No. 34.
c) Small and medium size governments may elect to delay capitalization of infrastructure.
d) Small governments may omit capitalizing all infrastructure acquired before the date on which they implement GASB Statement No. 34.

15. If a government elects the modified approach with regard to capitalization of infrastructure
a) Costs to preserve infrastructure assets are expensed as incurred with no additional disclosure required.
b) Costs to preserve infrastructure assets are expensed as incurred and disclosure of assessed condition is required.
c) Costs to preserve infrastructure assets are capitalized as incurred and depreciated over the estimated useful life with no additional disclosure required.
d) Costs to preserve infrastructure assets are capitalized as incurred and NOT depreciated over the estimated useful life with additional disclosure required.

16. A broker-dealer or other financial institution transfers cash to a government in exchange for securities and the government agrees to repay the cash plus interest and return the securities. From the government’s point of view, this transaction is a
a) Repurchase agreement.
b) Reverse repurchase agreement.
c) Derivative.
d) Option.

17. The risk that the other party to an investment will not fulfill its obligation is
a) Market risk.
b) Credit risk.
c) Collaterized risk.
d) Legal risk.

18. Which of the following is NOT an example of a derivative?
a) Stock options.
b) Interest-only strips.
c) Debt instruments backed by pools of mortgages.
d) Repurchase agreements.

19. Governments must classify bank balance in one of three categories. Which of the following is NOT one of those categories?
a) Insured or collateralized with the security held by the entity or its agents in the entity’s name.
b) Collateralized with security held by the pledging financial institution’s trust department.
c) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
d) Uncollateralized.

20. Investments, other than bank balances, must be classified into one of three categories. Which of the following is NOT one of those categories?
a) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
b) Uninsured and unregistered, with securities held by the other party’s trust department or agent in the government’s name.
c) Uninsured and unregistered in the government’s name and held by the other party or the other party’s agent.
d) Uncollateralized.

PROBLEMS (CHAPTER 7)

1. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare the appropriate journal entries in the General Fund.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

2. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, prepare the appropriate journal entries.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

3. GASB Statement No. 34 allows for two different treatments of infrastructure. If the government chooses to use the modified approach instead of the standard (depreciation) approach, what is the proper accounting treatment of preservation cost at the government-wide level?

ESSAYS (CHAPTER 7)

1. Governmental accounting does not permit depreciation to be charged on the operating statements of the governmental funds. Present arguments FOR reporting depreciation and present arguments AGAINST reporting depreciation.

2. What is “deferred maintenance”? What is its possible role in governmental financial reporting?

3. Recently, governmental investment policies have been sharply criticized because of some significant losses incurred by certain governments. What is the nature of the problem that is being criticized? What should be the role of accounting in determining and reporting investment strategies?

Chapter 8

Governmental Activities – Long-Term Obligations

TRUE/FALSE (CHAPTER 8)

1. Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.

2. General obligation debt is the obligation of the government at large and is thereby backed by the government’s general credit and revenue-raising powers.

3. Revenue debt is secured only by designated revenue streams.

4. When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as another financing source on the operating statement.

5. Per GASB Statement No. 34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.

6. A government is prohibited from ever recognizing bond anticipation notes (BANs) as long-term obligations.

7. Tax anticipation notes (TANs) must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.

8. Governments may enter into operating leases, but may not enter into capital leases.

9. In accounting for operating leases, the rental payments should be recognized in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

10. Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.

11. Although governments may elect to report conduit obligations in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

MULTIPLE CHOICE (CHAPTER 8)

1. A governmental entity that is unable to satisfy claims against it
a) Is prohibited from filing bankruptcy.
b) May not seek protection under the Federal Bankruptcy Code.
c) May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
d) Is automatically placed under the jurisdiction of a higher level of government.

2. To seek protection under the Federal Bankruptcy Code, a governmental entity must
a) Be unable to provide the level of services it has provided in the recent past.
b) Be unable to pay its debt in its current year.
c) Have budgeted expenditures in excess of revenues.
d) Both (b) and (c).

3. General long-term debt of a governmental entity includes
a) All future financial obligations.
b) All future financial obligations that result from past transactions.
c) All future financial obligations that result from past transactions for which the government has already received a benefit.
d) All future financial obligations that are backed by the government’s general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

4. In governmental fund-type financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

5. In the government-wide financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

6. In the government-wide financial statements, long-term liabilities of governmental entities are generally reported at
a) Face value.
b) Face value plus (minus) unamortized premium (discount).
c) Present value.
d) Market value of the obligation.

7. Pulling County has a December 31 fiscal year-end. In November, the County borrowed $8 million from a local bank, due in six months at 6% interest, to finance general government operations. The county pledges property tax revenues to secure the loan. At year-end, how should the bank note be displayed in the fund financial statements?
a) Nothing in the General Fund; Nothing in a Schedule of Changes in Long-Term Obligations.
b) General Fund–$8 million in Other Financing Sources; Nothing in a Schedule of Changes in Long-Term Obligations.
c) General Fund–$8 million in Other Financing Sources; $8 million in a Schedule of Changes in Long-Term Obligations.
d) General Fund–$8 million in Notes Payable; Nothing in a Schedule of Changes in Long-Term Obligations.

8. Governmental entities enter into capital leases, rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases
a) May be an effective means of circumventing debt limitations.
b) Are less expensive overall than buy and borrow arrangements.
c) Reduce the cash outflows related to the asset acquisition.
d) Have less impact on fund balance than buy and borrow arrangements.

9. New City entered into a lease agreement for several new dump trucks to be used in general government activities. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, acquisition of these dump trucks would require entries in which of the following funds and/or schedules?
a) General Fund only.
b) General Fund AND Schedule of Changes in Long-Term Debt Obligations.
c) General Fund AND Schedule of General Fixed Assets.
d) General Fund, Schedule of General Fixed Assets AND Schedule of General Long-Term Debt Obligations.

10. Southwest City enters into a lease agreement that contains a nonappropriation clause. The clause
a) Has been held by courts in 26 states to effectively cancel the lease.
b) Stipulates that the yearly lease payment must be appropriated by the City Council each year.
c) Prohibits the city from replacing leased property with similar property.
d) Permits the city to lease at lower rates than would be possible without the presence of the clause.

11. Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds) even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?
a) Revenue bonds may not require approval of the voters.
b) Revenue bonds may not be considered in legal debt limitations.
c) Revenue bonds may permit the interest costs to be passed on to the users.
d) All of the above.

12. Which of the following funds is most likely to receive the proceeds of revenue bonds?
a) General Fund.
b) Capital Project Fund.
c) City Utility Enterprise Fund.
d) Highway Department Special Revenue Fund.

13. Sun City is located in Hailey County. Sun Valley School District encompasses all of Sun City and some of Hailey County. Property in Sun City is assessed at $400 million; property in Hailey County is assessed at $800 million; property in Sun Valley School District is assessed at $600 million. The total debt outstanding for Sun City is $30 million; Hailey County is $50 million; Sun Valley School District is $45 million. Compute the amount of direct and overlapping debt for Sun City.
a) $ 30 million.
b) $ 75 million.
c) $ 85 million.
d) $125 million.

14. Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom they share boundaries is
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

15. Overlapping debt should be reported in which of the following ways?
a) It should be reported in the Schedule of Changes in Long-Term Obligations.
b) It should be disclosed as a note to the financial statements.
c) It should be reported in a schedule in the statistical section of the annual report.
d) It should not be reported in the financial statements of the reporting entity.

16. An obligation issued in the name of a government on behalf of a nongovernmental entity is called
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

17. The City of Pocahontas issued $20 million in general obligation bonds at par. The City loaned the proceeds to Domsee Fish Processors to expand the size of their facility, which would allow Domsee to hire additional workers. The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue. The bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant facilities built by Domsee. Where should the City report the bonds on the annual financial report?
a) In the government-wide financial statements.
b) In the notes to the financial statements.
c) In the proprietary fund financial statements.
d) In any of the above ways.

18. Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?
a) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government backs the bonds in the event of default by the private corporation.
b) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government does not back the bonds in the event of default by the private corporation.
c) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
d) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.

19. The Southside City has $95 million of debt recorded in its Schedule of Changes in Long-Term Obligations, made up of $60 million of general obligation debt, $2 million of compensated absences payable, $8 million claims and judgments, and $25 million of obligations under capital leases. The State limits the amount of general obligation debt that can be issued by a City to 20% of the assessed value of taxable property. The assessed value of property in Southside City is $500 million. The amount of legal debt margin for Southside City is
a) $ 5 million.
b) $ 40 million.
c) $ 60 million.
d) $100 million.

20. A state created a Housing Authority to provide financing for low-income housing. The Authority issues bonds and uses the proceeds for that purpose. Currently the Authority has outstanding $200 million in bonds backed by the State’s promise to cover debt service shortages should they arise. The State Constitution specifically limits the State to no more than $2 million in general obligation debt. How can the state officials defend the $200 million in debt outstanding?
a) The debt is not general obligation debt.
b) The State is only morally obligated on the debt.
c) The debt is the debt of the Authority not the State.
d) All of the above.

21. Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is
a) Committed debt.
b) Overlapping debt.
c) Conduit debt.
d) Moral obligation debt.

22. A City entered into a long-term capital lease for some office equipment. Assuming the city maintains its books and records in a manner to facilitate preparation of fund financial statements, what entry would be made in the General Fund to record this event?
a) Debit Expenditures; Credit Other Financing Sources—Leases.
b) Debit Equipment; Credit Other Financing Sources—Leases.
c) Debit Equipment; Credit Leases Payable.
d) No entry since it this event had no impact on financial resources.

23. Which of the following is likely to be used by a bond-rating agency to rate the general obligation bonds of a governmental entity?
a) A review of the Basic Financial Statements.
b) Consideration of economic statistics such as unemployment rates.
c) Consideration of legal debt margin.
d) All of the above.

PROBLEMS (CHAPTER 8)

1. During the fiscal year ended 6/30/02 the City of Hartsville engaged in the following transactions. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statement, prepare all necessary journal entries that the City should make for each transaction. Clearly indicate in which fund the entry is being made. If no entry is required, write ‘No Entry Required’.

a) In July 2001, the City issued $20 million in 6% general obligation term bonds to finance construction of a new building to house City offices. The bonds were issued at a premium of $200,000.

b) In September, 2001 the City transferred $1 million from the General Fund to cover the $.6 million principal and $.4 million interest payments due that month on debt issued in previous years.

c) In September, 2001 the City paid the principal and interest due from (b).

d) In June 2002, the City transferred $2 million from the General Fund to cover the $1.2 million interest payment and the $.8 million principal payment due in July on the bonds issued in July 2001.

2. A city enters into the following transactions during the current year. Assuming that the City maintains its books and records in a manner that facilitates the preparation of its fund financial statements, prepare entries to record the following transactions. Indicate the fund in which the entry is being made.

a) The City issues $5 million of tax anticipation notes, backed by property taxes that will be recorded in the General Fund.

b) The City issues $2 million of 90-day bond anticipation notes that it expects to roll over into long-term bonds.

c) The City repays the $5 million in (a)

d) The City successfully issues $20 million in long-term bonds and uses some of the proceeds to repay the notes in (c).

3. Young County engaged in the following debt-related transactions during the year. Assuming that Young County maintains its books and records in a manner that facilitates the preparation of its government-wide financial statement, prepare the necessary journal entries to record these transactions. Clearly indicate if debt is long-term or short-term (current). If no entry is required, write ‘No Entry Required’.

a) The County issued $5 million in 6%, 20-year bonds for $5,117,466 to yield 5.8 % to the investor.

b) The County made the first semi-annual interest payment on the bonds in (a). Assume an amount of $1,594 for amortization of the premium.

c) The County issues $3 million in 6% demand bonds for which it does not enter into a take-out agreement.

d) In anticipation of property tax revenues being received several months after fiscal year-end, the County borrows $2 million from a local bank payable in nine months.

e) The County leased a new machine for its County Highway Department in an arrangement that qualified as a capital lease. The present value of the minimum lease payments is $150,000, which approximates the fair value of the machine.

ESSAYS (CHAPTER 8)

1. Identify and define ‘conduit debt.’ What is/are the current reporting standards for conduit debt issued by governmental entities. Do you approve or disapprove of the use of conduit debt by governmental entities? Justify your answer. Do you approve or disapprove of the current reporting standards related to conduit debt? Why?

2. Generally accepted accounting principles require many assets to be reported at market values. However, few liabilities are reported at market value. What are the arguments for and against reporting liabilities at market value?

3. Why is information about long-term debt important to financial statement users?

Chapter 9

Business-Type Activities and Internal Services

TRUE/FALSE (CHAPTER 9)

1. In both the fund statements and the government-wide statements, business-type activities and internal services are on a full accrual basis, and their measurement focus is on all economic resources.

2. The operating statement required as one of the three basic financial statements for proprietary funds is called the statement of revenues, expenditures, and changes in fund net assets.

3. The amounts reported in proprietary fund statements are generally the same as those reported in the government-wide statements because both sets of statements are on a full accrual basis of accounting.

4. Governments are required to prepare a statement of cash flows for proprietary funds, but not for governmental funds.

5. GASB Statement No. 34 mandates that governments report their cash flows from operations using the indirect method.

6. The FASB mandates entities report their cash flows from operations using the direct method.

7. Governments generally do not have to get formal legislative approval for enterprise fund budgets or incorporate them into their accounting systems.

8. In accounting for closure and postclosure landfill costs in an enterprise fund, a government does not necessarily have to “fund” the costs during the landfill’s useful life; it merely has to report both an expense and a liability for them.

9. The revenues of an internal service fund are the expenditures and expenses of other funds of that government.

10. The proprietary fund statements do not include a total column for all proprietary funds.

MULTIPLE CHOICE (CHAPTER 9)

1. The appropriate measurement focus for the business-type activities of the City of Rockford is
a) Current financial resources.
b) Economic resources.
c) Both (a) and (b).
d) None of the above.

2. Which of the following is not a proprietary fund?
a) City Water Enterprise Fund.
b) City Motor Pool Internal Service Fund.
c) City Hall Capital Project Fund.
d) None of the above. They are all proprietary funds.

3. The appropriate basis of accounting for the proprietary funds of a governmental entity is
a) Cash basis.
b) Modified accrual.
c) Full accrual.
d) None of the above.

4. Which of the following is NOT a valid reason for governmental entities to engage in business-type activities?
a) The activities provide resources that would otherwise have to be raised in other ways.
b) The entity can provide the services more cheaply or efficiently than can a private firm.
c) The entity wants to subsidize the activity.
d) All of the above are valid reasons for governments to engage in business-type activities.

5. Which of the following is NOT a budget typically prepared for an activity accounted for in a proprietary fund?
a) Appropriation budget.
b) Cash budget.
c) Capital budget.
d) Flexible budget.

6. A proprietary fund of a governmental entity has donor-restricted assets on its balance sheet. Which of the following best describes where and how those assets will generally be displayed?
a) In a separate restricted asset category on the balance sheet.
b) Intermingled with other assets on the balance sheet.
c) Intermingled with other assets on the balance sheet but footnoted.
d) In a separate restricted fund.

Use the following information to answer #7 and #8.

The City of Brockton voted to establish an internal service fund to account for its printing services. The City transferred $500,000 cash from the General Fund to the newly created internal service fund.

7. The appropriate entry in the General Fund to account for this transfer would be a credit to cash for $500,000 and a debit for $500,000 to
a) Operating Transfer Out.
b) Nonreciprocal Transfer Out.
c) Expenditures.
d) Investment in Internal Service Fund.

8. The appropriate entry in the proprietary fund is a debit to cash for $500,000 and a credit for $500,000 to
a) Operating transfer in.
b) Nonreciprocal Transfer In.
c) Capital Contribution (Revenues).
d) Investment provided by the General Fund.

9. The City issued $2 million in general obligation bonds to acquire a fleet of vehicles for the Central Motor Pool Internal Service Fund At the date of issue, the appropriate entry in the proprietary fund is a $ 2 million debit to cash and a $2 million credit to
a) Bonds Payable.
b) Contribution Capital (Revenues).
c) Contributed Capital (Revenues) AND show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.
d) No entry in the proprietary fund. Show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.

10. Which of the following is NOT a rationale/justification for reporting the business-type activities of a government in a separate fund?
a) Legally restricted resources should be reported apart from those that are unrestricted.
b) Separate funds facilitate budgeting, planning, and controlling.
c) Separate funds facilitate the assessment of performance of the activity.
d) Separate funds facilitate the assessment of fiscal status of the activity.

11. Which of the following are required basic statements of a proprietary fund?
a) Balance Sheet, Income Statement, Statement of Cash Flows.
b) Balance Sheet, Statement of Revenues, Expenses, and Changes in Equity, and a Statement of Cash Flows.
c) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets.
d) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets, and Statement of Cash Flows.

12. Franklin County operates a solid waste landfill that is accounted for in an enterprise fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $300,000. The entry(ies) to record this cost should be
a) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000.
b) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000 AND include an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
c) Show only an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund; No entry in the Schedule of Changes in Long-Term Liabilities.

13. Marsh Lake County operates a solid waste landfill that is accounted for in a governmental fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $600,000. The entry to record this cost should be
a) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000.
b) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000 AND include $600,000 as an addition on the Schedule of Changes in Long-Term Obligations.
c) No entry in the fund; include $600,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund or Schedule.

14. Over the long run, governmental internal service funds are intended to
a) Generate revenues sufficient to cover the full costs of providing services.
b) Generate revenues sufficient to cover the full costs of providing services and to earn a profit.
c) Generate revenues sufficient to cover the current operating costs of providing services.
d) Generate revenues sufficient to cover the current operating costs of providing services and to earn an operating profit.

15. Which of the following is NOT true about internal service funds as reported in the fund financial statements?
a) Costs reported by internal service funds are reported twice within the same set of financial statements.
b) Billing rates must be set to cover the full cost of providing the goods or services.
c) Depreciation can be charged to governmental funds through the billing rates established by the internal service fund.
d) Deficits or surpluses in the general fund can be transferred to the internal service fund by adjusting the billing rates.

16. In the Statement of Net Assets, the net assets of a proprietary fund should be displayed in which of the following categories?
a) Unrestricted Fund Balance, Restricted Fund Balance, Invested in Capital Assets.
b) Unrestricted Net Assets, Restricted Net Assets, Invested in Capital Assets Net of Related Debt.
c) Unrestricted Net Assets, Restricted Net Assets, Net Assets Available for Use.
d) Net Assets Available for Use.

17. A Statement of Revenues, Expenses, and Changes in Fund Net Assets should include which of the following in addition to operating revenues and operating expenses and ending Net Assets?
a) Nonoperating revenues and expenses.
b) Nonoperating revenues and expenses, and Other changes in Net Assets.
c) Nonoperating revenues and expenses, Capital Contribution and Other changes in Net Assets, and Beginning Net Assets.
d) None of the above.

18. In which of the following circumstances must an enterprise fund be used to account for the activity?
a) A newly created electric utility fund will finance its operations by a charge to users based on kilowatt hours used.
b) To finance the acquisition of plant facilities a newly created electric utility issues general obligation debt.
c) To finance the acquisition of plant facilities a newly created electric utility issues revenue bonds which will be repaid from operations of the electric utility.
d) To acquire needed plant facilities a newly created electric utility enters into long-term lease agreements.

19. Washington County has designated the general fund as the single fund to account for its self-insurance activities. What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the other funds.
b) The amount of actual claims expenditures.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from other funds and activities to the general fund for self-insurance purposes.

20. Lehi City has designated an internal service fund as the single fund to account for its self-insurance activities. Most of the insured activities such as the police department, fire department, and general government functions are accounted for in the General Fund. What is the maximum amount that can be charged to expenditure in the General Fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the General Fund by the internal service fund.
b) The amount of actual losses incurred by the insurance activity.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from the General Fund to the internal service fund for self-insurance purposes.

Use the following information to answer questions #21 and #22.
During the year the City’s Self-Insurance Internal Service Fund billed the General Fund $300,000 for ‘premiums,’ of which $30,000 was for catastrophic losses and the balance was the premium computed on an actuarially-determined basis. During the year the City incurred $250,000 in claims losses. The total amount transferred to the Self-Insurance Fund by the General Fund was $310,000.

21. The amount the City Self-Insurance Fund can recognize as revenue is
a) $310,000
b) $300,000.
c) $270,000.
d) $250,000.

22. The amount the City General Fund can recognize as expenditure is
a) $310,000.
b) $300,000.
c) $270,000.
d) $250,000.

23. When a governmental enterprise fund has restricted assets on its balance sheet which of the following is a true statement?
a) The total of the restricted assets in the asset section will be equal to the “Restricted Net Assets” amount in the equity section.
b) The total of the restricted assets will be offset by a liability of an equal amount.
c) The total of the restricted assets less related liabilities will be equal to the “Restricted Net Assets” amount in the equity section.
d) None of the above statements is true.

24. Any internal service fund balances that are not eliminated in the consolidation process should generally be presented on the government-wide financial statements
a) Should not be presented on the government-wide financial statements.
b) In the internal service fund column.
c) In the governmental activities column.
d) In the business-type activities column.

25. On the fund financial statements, internal service activities should be presented
a) In the Propriety Fund statements, net of interfund eliminations.
b) In the Governmental Fund statements, net of interfund eliminations.
c) In the Proprietary fund statements, without any interfund eliminations.
d) In the Governmental Fund statements, without any interfund eliminations.

26. Cash flows from Operating Activities does NOT include which of the following as cash inflows?
a) Cash collection of receivable for sale of services.
b) Grants for operating activities.
c) Interest and dividends earned.
d) Receipts for services performed for other funds.

27. Cash flows from Operating Activities does NOT include which of the following as cash outflows?
a) Grants to other governments for operating activities.
b) Grants to other governments for capital asset acquisitions.
c) Payments for services performed by other funds.
d) Payments in lieu of taxes.

PROBLEMS (CHAPTER 9)

1. Benton County voted to establish an internal service fund to account for printing and copying for all its department and agencies. The County engaged in the following activities related to the new fund. Prepare transactions to record these events in the internal service fund. If no entry is required, write “No Entry Required.”

a) The County Commission voted to transfer $200,000 from the General Fund to the internal service fund to establish the new fund.

b) Leased equipment to be used in printing activities. The total lease obligation is $600,000.

c) Issued $1 million in general obligation bonds at 101. The bonds were issued to acquire additional equipment. The bonds are to be serviced from the internal service fund.

d) Purchased equipment at a cost of $980,000. The equipment has an estimated useful life of nine years and an estimated salvage value of $80,000.

e) Billed the General Fund for 1998 copying and printing charges, $70,000.

f) Paid salaries to printing employees, $50,000.

2. The City of Petersburg has operated a City Utility Enterprise Fund for a number of years. The fund accounts for the activities of the City-owned electric, water and sewer systems. During the current year, the City engaged in the following transactions related to the City Utility Fund. Prepare the appropriate journal entries. If none is required, write “No Entry Required.”

a) The City billed its customers $1 million for services provided during the year.

b) The City received $260,000 from a developer to connect new houses to the existing utility lines.

c) Depreciation on existing physical plant was $700,000.

d) Revenue bonds in the amount of $2 million were issued at par to finance new construction. The bond agreement requires that the City retain $200,000 of the bond proceeds for purposes of servicing the debt if revenues are not sufficient to do so.

3. The City of San Dominguez received a $500,000 federal grant to acquire several buses to be used in its public transit system. The City paid $400,000 to acquire several buses. At year-end, $100,000 of the grant had not yet been used. During the year total depreciation on the buses was $40,000. Revenues for the public system were $600,000, operating expenses (other than depreciation) were $470,000. Assuming the Public Transit Proprietary Fund began the year with Unrestricted NetAssets of $420,000, prepare the following for the Public Transit Enterprise Fund.
a) Statement of Revenues, Expenses, and Changes in Fund Net Assets.
b) Net Asset section of the Balance Sheet.

4. Greene County operates a solid waste landfill that is accounted for as an enterprise fund. At the end of 1999, the Landfill Enterprise Fund had a Liability for Landfill Costs of $50,000. The County estimated the costs associated with closing monitoring the landfill as follows. Calculate the total costs as of year-end 2000 and 2001 and the current period costs. Prepare the required journal entry(ies) at year-end 2000 and 2001. Be sure to show all of your work.
2000 2001
Costs
Equipment to be installed $2.5 million $3.0 million
Final cover $ .5 million $1.0 million
Monitoring and maintaining $4.0 million $4.0 million
Capacity used in total 30,000 58,000
Estimated total capacity 600,000 580,000

ESSAYS (CHAPTER 9)

1. Internal service funds are used by many governmental entities to account for activities that provide services to the entity itself. What are the ramifications of such an accounting arrangement? What are the effects on the entity’s financial statements?

2. Governmental entities may elect to account for their landfill activities in either of two different funds. Explain the differences that would result if one government elected to account for its landfill activities in its general fund and another government elected to account for its landfill activities in an enterprise fund.

3. Because of the rising cost of commercial insurance, many governments have elected to be ‘self-insured.’ Explain what is meant by being ‘self-insured.’ Explain the difference in the accounting for self-insurance activities between a governmental fund and a proprietary fund.

Chapter 10

Permanent Funds and Fiduciary Funds

TRUE/FALSE (CHAPTER 10)

1. Per GASB Statement No. 34, permanent funds are classified as fiduciary funds.

2. In accounting for permanent funds only the income can be spent; the principal must be preserved intact.

3. Fiduciary funds focus on current financial resources and use a full accrual basis of accounting.

4. Fiduciary funds are excluded from the government-wide statements.

5. The concept of major versus nonmajor funds does not apply to fiduciary funds, as it does to governmental and proprietary funds.

6. Accounting for the employer’s contribution in a defined contribution plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

7. Accounting for the employer’s contribution in a defined benefit plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

8. Most public pension plans are defined benefit plans.

9. An employer may have a liability to a defined benefit plan other than for its annual required contributions, depending on the future financial health of the plan.

10. In an agency fund, assets always equals fund balance because there are no liabilities.

MULTIPLE CHOICE (CHAPTER 10)

1. A governmental entity receives a gift of cash and investments with a fair value of $200,000. The donor specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. The $200,000 gift should be accounted for in which of the following funds?
a) Investment trust fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

2. In previous years, Center City had received a $400,000 gift of cash and investments. The donor had specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. During the current year, the earnings from this gift were $24,000. The earnings from this gift should generally be considered revenue to which of the following funds?
a) Special revenue fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

3. Which of the following activities of a governmental entity should be accounted for in a fiduciary fund?
a) Funds received from the federal government to support public transportation activities.
b) Funds received from an individual who specified that the principal must be kept intact but the income can be used to support families of police officers killed in the line of duty.
c) Funds received from the state government that must be used to purchase capital assets.
d) Funds received from a contractor to assist with the development of utility infrastructure.

4. What basis of accounting is used to account for transactions of a governmental private-purpose trust fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

5. Which of the following would NOT be accounted for in a fiduciary fund of a governmental entity?
a) Nonexpendable resources held for the benefit of other governmental units.
b) Nonexpendable resources held for the benefit of the government holding the resources.
c) Expendable resources held for the benefit of other governmental units.
d) Funds held as an agent for other entities.

6. Permanent funds are classified as
a) Governmental funds.
b) Proprietary funds.
c) Fiduciary funds.
d) Trust funds.

7. Which of the following is NOT a fiduciary fund?
a) Pension trust funds.
b) Investment trust funds.
c) Permanent funds.
d) Private-purpose trust funds.

8. What basis of accounting is used to account for transactions of a government permanent fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

Use the following information to answer #9-#12
Previously a city received a $1 million gift, the income from which was restricted to support maintenance of city-owned parks. During the current year the endowment earned $70,000 of which $50,000 was transferred to the City Park Special Revenue Fund.

9. On the year-end fund financial statement, the endowment fund would report revenues of:
a) $0.
b) $50,000.
c) $70,000.
d) None of the above.

10. On the year-end fund financial statement, the endowment fund would report the $50,000 transferred to the Special Revenue Fund as:
a) A reduction of revenues.
b) A nonreciprocal transfer out.
c) A reduction of equity.
d) An expenditure.

11. On the year-end financial statements, the endowment fund would report, as a result of these transactions, a fund balance (net assets) of:
a) $1,000,000
b) $1,070,000
c) $1,050,000
d) $1,020,000

12. On the year-end financial statements, the special revenue fund will report
a) $50,000 Nonreciprocal Transfer In
b) $70,000 Nonreciprocal Transfer In
c) $50,000 Revenue
d) $70,000 Revenue

13. Cedar City has a permanent fund that reported current year investment earnings (realized and unrealized) of $80,000. The endowment principal is $800,000 and the city council has adopted a policy of considering only the inflation adjusted rate of return to be available for transfer to the recipient fund. During the current year the Council declared the inflation-adjusted rate of return to be 8%. How much revenue would be recognized in the permanent fund?
a) $ 0.
b) $ 64,000.
c) $ 80,000.
d) Unable to determine.

14. At the beginning of the year, the permanent fund of Rapid City had an investment portfolio with a historical cost of $200,000 and a fair value of $220,000. There were no purchases or sales of securities during the year. At year end the portfolio had a fair value of $240,000. At the end of the year Rapid City will account for this increase in fair value in which of the following ways?
a) Credit Investment Income, $20,000.
b) Credit Investment Income, $40,000.
c) Credit Fund Balance, $20,000.
d) No entry is made to recognize increase in fair value.

15. Several years ago, a donor gave $5 million to the City and specified that the principal was to be kept intact but the earnings were to be used to support operations of the city parks. During the current year, the City earned $300,000 on the gift. To what type of fund should the City transfer accountability for the $300,000 earnings.
a) It should not transfer accountability. The $300,000 should remain in the Permanent Fund.
b) A special revenue fund.
c) The General Fund.
d) An enterprise fund.

16. A defined contribution pension plan is one in which the employer agrees to which of the following?
a) The employer agrees to make specific payments to a specified pension plan with no guarantee of a specific pension amount to be paid to the employee.
b) The employer agrees to make specific payments to a specified pension plan AND guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
c) The employer agrees to make necessary payments to a specified pension plan that guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
d) The employer agrees to pay a specified amount (usually determined by length of service and salary) to the employee, but the employer makes no specific guarantee to make payments to the specified pension plan.

17. Hill City Light & Water (a proprietary fund) contributes to a defined benefit plan for its employees. During 1999 Hill City contributed $27 million to its pension plan. On February 15, 2000, Hill City made an additional $3 million contribution related to 1999. The actuarially determined contribution amount was $32 million. The amount of pension expense recognized by Hill City Light & Water for 1999 should be:
a) $ 0
b) $ 27 million
c) $ 30 million
d) $ 32 million

18. During the fiscal year ended December 31, 2001, the Highland City General Fund contributed $48 million to a defined benefit pension plan for its employees. On February 27, 2002, Highland made an additional $2 million contribution related to the 2001 pension contribution requirements. The actuarially determined contribution amount for 2001 is $52 million. The amount of pension expenditure recognized by Highland City General Fund for 2001 should be:
a) $ 0
b) $ 48 million
c) $ 50 million
d) $ 52 million

19. The Schedule of Changes in Long-Term Obligations contains an account Net Pension Obligation. Which of the following describes the event that gave rise to this account?
a) The actual contribution by a proprietary fund was less than the actuarially required contribution.
b) The actual contribution by a governmental fund was less than the actuarially required contribution.
c) The actuarially computed pension liability exceeded the pension plan assets.
d) The pension plan assets exceeded the actuarially computed pension liability.

20. Required disclosure by a government General Fund related to its pension plan does NOT include which of the following?
a) The employer’s funding policy.
b) The components of the pension cost.
c) The key assumptions used in determining the pension costs.
d) The present value of the future benefits to be paid.

21. A plan’s unfunded actuarially accrued liability is the excess of
a) The actuarially-determined plan cost over the actual contribution.
b) The actuarially-determined plan cost over the plan assets.
c) The actuarially-determined pension liability over the plan assets.
d) The actuarially-determined pension liability over the total contributions.

22. Citizens within a defined geographic area of Hill City created a special assessment district to facilitate the construction of sidewalks. Hill City was responsible for overseeing the entire construction project. Hill City issued bonds in its own name to pay the contractor for the construction. However, Hill City was not responsible in any manner for the bonds. The bonds were secured by the special assessments which would be levied against the property within the special assessment district. Collections of special assessments would be recorded in which of the following funds of Hill City?
a) Special Assessment Fund.
b) Agency Fund.
c) Special Revenue Fund.
d) Debt Service Fund

23. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. The City will select the contractors to provide the feeding and approve the participants in the program. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

24. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. Senior citizens whose income is below a specified amount (the amount was specified by the Federal government) are eligible to participate in the program. Monthly checks of $100 (this amount was specified by the Federal government) will be mailed to eligible senior citizens. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

25. Financial assets held by a governmental investment pool should be valued at
a) Cost.
b) Amortized cost.
c) Fair value on the date of the financial statements.
d) Fair value computed by a weighted-average approach.

PROBLEMS (CHAPTER 10)

1. Name the two financial statements and two schedules of required supplementary information required by GASB Statement No. 25 for each defined benefit pension plan.

2. The City of Shane received a cash gift of $125,000 from a citizen who specified that the gift must be used to support recreational activities for youth of the City. The City accounted for this gift in the appropriate fund. During the year the City engaged in the following activities. Prepare the appropriate journal entries.

a) The City accepted the donation.

b) The City engaged in a fund-raising effort to provide additional funds to support youth recreational activities. The City raised $6,000 in pledges. The City collected $2,000 in cash with the remaining pledges collectible shortly after the end of the year.

c) The City temporarily invested $50,000 of the gift in marketable securities.

d) The City spent $26,000 on goal posts, nets, etc., for the soccer field.

e) The City received $2,000 in dividends and interest earned on the temporary investment.

f) At year-end the temporary investments had a market value of $51,000.

g) The City closed the revenue and expense accounts.

3. Assume a state government qualifies as a “cash conduit” on a $1 million pass-through grant from the federal government to a local government. Record the following transactions in the state’s Pass-Through Agency Fund.

a) Receipt of the $1 million in cash.

b) Cash disbursement of $1 million to the local government.

ESSAYS (CHAPTER 10)

1. Explain the difference between public-purpose trusts and private-purpose trusts.

2. Agency funds are excluded from the face of the external financial statements for a governmental entity. What are agency funds? Should they be presented on the face of the government’s financial statements? Could, or should, they be presented elsewhere?

3. Why do agency funds have no fund equity or operating accounts?

Chapter 11

Issues of Reporting, Disclosure, and Financial Analysis

TRUE/FALSE (CHAPTER 10)

1. Governments must incorporate their blended component units into both the fund and government-wide statements.

2. Governments must incorporate their discretely presented component units into both the fund and the government-wide statements.

3. A related organization is a contractual arrangement, whereby two or more participants agree to carry out a common activity and share its risks and rewards.

4. A related organization must be incorporated into the primary government’s financial statements.

5. The comprehensive annual financial report (CAFR) is divided into three main sections: the table of contents section, the auditors’ report section, and the financial section.

6. The typical audit is designed to cover all information included in the CAFR.

7. There are only two government-wide statements: the statement of net assets and the statement of activities.

8. Required notes are an essential element of the basic financial statements.

9. Required supplementary information (RSI) is considered part of the basic financial statements.

10. Public colleges and universities must adhere to the same GASB pronouncements as other types of governments.

MULTIPLE CHOICE (CHAPTER 11)

1. Which of the following is NOT a primary government?
a) A state government.
b) A general purpose local government with the ability to determine its own budget.
c) A general purpose local government whose tax levies must be approved by the state.
d) A special purpose local government whose tax levies must be approved by the state.

2. Which of the following is NOT required for a special purpose local government to be considered a primary government?
a) It must have a separately elected governing body.
b) It must have the power to issue tax exempt debt.
c) It must be legally separate from other primary governments.
d) It must be fiscally independent of other governments.

3. Which of the following is NOT a necessary condition for a governmental entity to be considered fiscally independent?
a) It must be able to determine its own budget.
b) It must be able to levy taxes and/or set rates for its services.
c) It must be able to issue bonds.
d) It must be able to issue bonds that are tax-exempt.

4. Which of the following is NOT a necessary characteristic of a component unit?
a) It is legally separate from the other government.
b) The other government appoints a voting majority of the component unit’s governing body or a voting majority of the unit’s governing body is composed of officials of the other government.
c) The other government can impose its will on the unit or the unit has the potential to provide a financial benefit to or impose a financial burden on the other government.
d) The other government provides services that are used by both governments.

5. The Marsh River School District, a legally separate school district that has a separately elected governing body, cannot enter into any debt agreements without the approval of the County Commission. Marsh River School District would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

6. The County Commission appoints a voting majority of the members of the Board of a particular organization. The County Commission cannot impose its will upon the organization. There is no potential for the organization to provide any financial benefit to the County nor is there is any potential for the organization to impose any financial burden on the county. The organization is an example of a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

7. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. The authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

8. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. In what manner would the Authority be included in the State’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

9. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by the Authority upon receiving an affirmative vote by a simple majority of the board. The Housing Authority would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

10. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by Authority upon receiving an affirmative vote by a simple majority of the board. In what manner would the Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

11. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. The County Hospital would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

12. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. In what manner would the Hospital be included in the County’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

13. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. The Authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization
d) Affiliated organization.

14. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. In what manner would the Port Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

15. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. The County Hospital would be a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

16. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. In what manner would the Hospital be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Only by note disclosure of the relationship.
d) Not included in any manner.

17. A Comprehensive Annual Financial Report for the City of Highland Hills need not include which of the following sections?
a) Condensed summary data.
b) Introductory section.
c) Financial section.
d) Statistical section.

18. The introductory section of a CAFR does NOT include which of the following?
a) Table of Contents.
b) Letter of Transmittal.
c) Auditor’s Opinion on the Basic Financial Statements.
d) GFOA Certificate of Achievement.

19. The financial section of a CAFR does not include:
a) Letter of Transmittal.
b) MD&A and Other RSI.
c) Basic Financial Statements.
d) Notes to the financial statements.

20. Which of the following statements is not a required part of the General Basic Financial Statements of the City of Highland Hills?
a) Government-wide Statement of Net Assets.
b) Statement of Revenues, Expenditures, and Changes in Fund Balances for all Governmental Funds.
c) Statement of Revenues, Expenses, and Changes in Net Assets for all Proprietary and Fiduciary Funds.
d) Statement of Cash Flows for all Proprietary Funds.

21. The auditor’s report generally includes an opinion on which of the following sections of the CAFR?
a) The introductory section, the financial section, and the statistical section.
b) The introductory and the financial sections only.
c) The statistical and the financial sections only.
d) The financial section only.

22. Government-wide financial statements include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Activities.
d) Statement of Net Assets; Statement of Activities; Statement of Cash Flows; Statement of Changes in Long-Term Obligations.

23. Fund Financial Statements include which of the following for a proprietary fund?
a) Balance Sheet; Statement of Revenues, Expenses, and Changes in Net Assets.
b) Statement of Net Assets; Statement of Revenues, Expenses, and Changes in Net Assets; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Changes in Net Assets.
d) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.

24. Fund Financial Statements include which of the following for a governmental fund?
a) Statement of Net Assets; Statement of Changes in Net Assets.
b) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.
c) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance; Statement of Cash Flows.
d) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance.

25. Fund financial statements for Fiduciary Funds include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets.
d) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets; Statement of Cash Flows.

26. With regard to combining statements, which of the following statements is true?
a) Combining statements for nonmajor governmental funds are optional.
b) Combining statements for nonmajor governmental funds are required.
c) Combining statements for nonmajor internal service funds are optional.
d) Combining statements for all internal service funds is optional.

27. With regard to MD&A, which of the following is true?
a) Is necessary to understanding a government’s financial standing.
b) Is necessary to provide information not already provided by the basic financial statements.
c) Is necessary to provide information not already provided by the CAFR.
d) Should not be required.

PROBLEMS (CHAPTER 11)

1. For each of the following independent cases state whether or not the entity described should be included in the financial statements of the primary government and if so, how? Be concise but adequately defend your answer using GASB criteria.

a) The Planning and Development Authority is a separate legal entity with a five-member board appointed as follows: one member appointed by the School District, one member appointed by the City, one member appointed by the County, and two members elected by the three appointed members. The Planning and Development Authority borrowed $50,000 from the City. The money was used to make loans to businesses agreeing to relocate to the immediate area. Repayments of the principal and interest by borrowers is available for lending to new entities.

b) The State created a Public Building Authority, a separate legal entity. The Governor appoints a voting majority of the board of the Authority. The Authority issues bonds, backed by the assets financed with the proceeds. The Authority leases the buildings to the State and use the proceeds of the leases to service the debt on the bonds.

c) Bane County Hospital is built on land donated to the hospital by the US Bureau of Land Management. The hospital board members elect replacements to the Board without outside nominations. The hospital is entirely supported by revenues generated by the hospital. The County Commission must approve the budget each year, but the County Commission has never questioned any item in the budget.

d) The State University board of trustees are elected in a statewide general election. The State provides approximately half of the operating revenues necessary to fund University programs. State laws apply to the conduct of business at the University.

2. Outline the required parts of a Comprehensive Annual Financial Report.

ESSAYS (CHAPTER 11)

1. The state established the State Housing Authority to finance construction of low-income housing. The Authority, a state-owned corporation, is governed by an independent board of directors, the members of which are appointed by the governor. They can be removed only for cause. The board of directors has complete control over the Authority’s operations. The Director is hired by the Board and reports to the Board; the Director cannot be removed by the Governor. Although the State Constitution limits the State to $2 million of bonds, the Authority issued $970 million in bonds to finance construction projects. Older debt issues are issued by the Authority but are backed by the taxing power of the State. The newer bonds are issued by the Authority but are revenue bonds only.

The Authority uses the proceeds of its debt to make loans to finance housing construction. Debt is serviced from monies received in repayment of loans made by the Authority.
Do you believe the State should include the Authority in its reporting entity? If so, how? Justify your answer using the GASB Financial Reporting Entity criteria.

2. A Comprehensive Annual Financial Report includes a Statistical Section. What kinds of information are found in the statistical section? To what use would a reader put the information found in the statistical section? In your opinion, is the statistical section worth the effort put into its preparation?

3. GASB reporting standards require that legally separate component units be included on the face of the financial statements of the primary government. Small City created a legally separate City Utility Service. The Small City Council appoints the Utility board members, authorizes the bonds of the Utility, and approves its budget. Small City’s general fund revenues are $58 million; the revenues of the Public Utility are $100 million (the Public Utility owns a generating plant and sells its excess power to other communities). Discuss the appropriate reporting for the Public Utility. Do you think that this presentation is meaningful? Why or why not?

Chapter 12

Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 12)

1. The FASB has standard-setting jurisdiction over all private not-for-profits and all government-owned not-for-profits.

2. Private not-for-profit accounting is closer to business than to government accounting.

3. FASB Statement No. 117 directs that revenues and expenses be reported in a statement of financial position.

4. In the statement of activities, FASB Statement No. 117 requires revenues to be reported as increases in one of the three categories of net assets, depending on donor-imposed restrictions; however, all expenses should be reported as decreases in unrestricted net assets.

5. Restricted contributions may be reported as unrestricted if the restriction has been met in the same period as the contribution is made.

6. FASB Statement No. 95 requires not-for-profits use the direct method in the preparation of the statement of cash flows.

7. In accounting for investments, not-for-profits, like businesses, must report their investments at fair value and classify the investments as either trading, available-for-sale, or held-to-maturity.

8. Absent explicit donor or legal stipulations, a not-for-profit’s endowment principal (permanently restricted net assets) would not be affected by either gains or losses on investments.

9. Not-for-profits cannot own or be integrally affiliated with either businesses or other not-for-profits.

10. FASB Statement No. 93 makes the recognition of depreciation on long-lived assets optional at the discretion of the not-for-profit.

MULTIPLE CHOICE (CHAPTER 12)

1. Financial statements for Smith College, a church-supported college, should be prepared according to standards set by
a) AICPA.
b) FASB.
c) GASB.
d) Smith may choose any of the above.

2. The basis of accounting used by not-for-profit organizations in their external financial reports is
a) Industry-specific basis of accounting.
b) Cash basis of accounting.
c) Modified accrual basis of accounting.
d) Accrual basis of accounting.

3. FASB requires the focus of external financial reporting be on
a) The donor-imposed restrictions on resources.
b) All restrictions on resources.
c) Funds of the entity.
d) The entity taken as a whole.

4. Expenses incurred by not-for-profit organizations should be reported as
a) Decreases in one of the three categories of net assets.
b) Decreases in unrestricted net assets.
c) Decreases in temporarily restricted net assets.
d) Decreases in permanently restricted net assets.

5. Revenues of a not-for-profit organization should be reported as
a) Increases in one of the three categories of net assets.
b) Increases in unrestricted net assets.
c) Increases in temporarily restricted net assets.
d) Increases in permanently restricted net assets.

6. Restricted gifts to not-for-profit organizations
a) Must always be shown as an increase in restricted net assets.
b) Must always be shown as an increase in unrestricted net assets.
c) May be shown as an increase in unrestricted net assets if the restriction is met in the same period.
d) May be shown as an increase in unrestricted net assets at the discretion of management.

7. The account title “Resources Released from Restriction” is reported by a ‘restricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

8. The account title “Resources Released from Restriction” is reported by an ‘unrestricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

9. FASB requires that all not-for-profit organizations report expenses
a) By object.
b) By function.
c) By natural classification.
d) By budget code.

10. Voluntary health and welfare organizations must also report expenses by
a) Object.
b) Function.
c) Natural classification.
d) Budget code.

11. The National Association for the Preservation of Wildlife received $10,000 from a benefactor to support the overall objective of the organization. This amount will be recognized as revenue
a) In the period received.
b) In the period spent.
c) Never, because it is not earned.
d) In the period it becomes susceptible to accrual.

12. Not-for-profit organizations report their cash flows in which of the following categories?
a) Operating, noncapital financing, capital financing, investing.
b) Operating, noncapital financing, investing.
c) Operating capital financing, investing.
d) Operating, financing, investing.

13. Not-for-profit organization should report contributions restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

14. Not-for-profit organizations should report interest and dividends earned and restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

15. Revenue from an exchange transaction may be classified as an increase in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Any of the above.

16. During the annual fundraising drive, the Cancer Society raised $900,000 in pledges of financial support for their general operations. By the fiscal year-end, the Society had collected $600,000 of the pledges. The Society estimates that 10% of the remaining pledges will be uncollectible. The NET amount of revenue the Society should recognize during the current year from this pledge drive is
a) $900,000.
b) $870,000.
c) $810,000.
d) $600,000.

Use the following information to answer #17 – #19.
United Charities’ annual fund raising drive in 2001 raised pledges of $600,000 of which $400,000 were collected in 2001 and $100,000 were collected in 2002. United Charities estimates $75,000 of the remaining pledges will never be collected.

17. The increase in unrestricted net assets in 2001 as a result of the fund raising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

18. The increase in temporarily restricted net assets in 2001 as a result of the fundraising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

19. In 2002, the change in unrestricted net assets is
a) $0
b) $100,000 increase.
c) $100,000 decrease.
d) $500,000 increase.

20. In a prior year, United Charities received a $100,000 gift to be used to acquire vans to provide transportation for physically challenged adults. During the current year, United acquired two vans at a cost of $60,000 each. The appropriate entry(ies) to record the acquisition should be
a) UNRESTRICTED FUND
Resources Released from Restriction $100,00
Cash $100,000
RESTRICTED FUND
Fixed Assets $120,000
Cash $ 20,000
Resources Released from Restriction $100,000
b) RESTRICTED FUND
Resources Released from Restriction $ 100,000
Cash $100,000
UNRESTRICTED FUND
Fixed Assets $120,000
Resources Released from Restriction $100,000
Cash $ 20,000
c) UNRESTRICTED FUND
Fixed Assets $120,000
Cash $120,000
d) RESTRICTED FUND
Fixed Assets $120,000
Cash $120,000

21. In the current year National Pet Charities, which uses fund-type accounting to maintain its books and records, received a $30,000 contribution to help educate people on responsible pet ownership. During the current year, the entry to record this donation is
a) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
b) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
c) UNRESTICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
RESTRICTED FUND. No entry.
d) UNRESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
RESTRICTED FUND. No entry.

22. Grace Church, a nondenominational not-for-profit entity, operates a school in connection with the Church. This year members of the Church decided to construct a new wing on the school with six classrooms. The Church hired an architect and a construction supervisor. The bulk of the labor for construction was donated by Church members who were willing workers but not necessarily skilled carpenters. Materials for the construction cost $300,000 and the paid labor was $100,000. The fair value of the completed building is $1 million. When the building is completed what should be the balance in the asset account ‘Building’ and the account ‘Contributed Revenue.’
a) Building $400,000; Contributed Revenue $0.
b) Building $400,000; Contributed Revenue $600,000.
c) Building $1 million; Contributed Revenue $600,000.
d) Building $1 million; Contributed Revenue $0.

23. Mary’s Extended Care Center, a not-for-profit entity, enjoys the services of a group of high school age people who each agree to work three afternoons a week for three hours each afternoon performing a variety of patient-related services such as writing letters for those who are unable to do so, delivering mail to the patient rooms, and pushing wheel-chair patients across the grounds. The services rendered by these young people enhance the quality of life for the residents. They could not be provided if they were not donated because there are not enough resources to do so. The past year the young people donated 5000 hours in total. The services would have cost $6.00 per hour if they had been purchased but they were worth $10 an hour to St. Mary’s. What is the amount of contributed revenue that should be recognized by St. Mary’s related to these services?
a) $50,000.
b) $30,000.
c) $0.
d) Cannot determine.

24. Simplex Games, a not-for-profit entity organized to provide athletic competition opportunities for high school students, utilizes a number of volunteers in carrying out its mission. At the 2002 Games 50 volunteers provided a total of 1000 hours of service performing tasks such as picking up litter and delivering water to the athletes. A local CPA firm donates its services to prepare the annual tax return and other federal and state required paperwork which must be filed to maintain its status as a tax-exempt organization. During 2002 the CPA firm provided 50 hours of service. If purchased, the CPA services would have cost $50 per hour and the game workers would have cost $5 per hour. How much contributed service revenue should Simplex Games recognize in 2002?
a) $7,500.
b) $5,000.
c) $2,500.
d) $0.

25. A not-for-profit Art Museum that has elected not to capitalize its art collection receives a donation of a rare piece of Tlinket Indian art. The donor paid $8,000 for the piece several years ago. Today the piece has an estimated fair value of $50,000. What entry should the Art Museum make upon receipt of this donation?
a) Debit Collection Items $50,000; Credit Donated Revenue $50,000.
b) Debit Collection Items $8,000; Credit Donated Revenue $8,000.
c) Debit Collection Items $50,000; Credit Unrestricted Net Assets $50,000.
d) No entry required.

26. Native Art Museum, a not-for-profit entity that elects not to capitalize its collection items, purchased for $10,000 a wonderful totem pole for display near the door of the Museum. As a result of this transaction, which of the following entries should be made?
a) Debit Collection Items $10,000; Credit Cash $10,000.
b) Debit Collection Expense $10,000; Credit Cash $10,000.
c) Debit Unrestricted Net Assets $10,000; Credit Cash $10,000.
d) No entry is required.

27. The Nature Conservatory, a not-for-profit entity, engaged in a fundraising drive to raise money to buy land to provide a habitat for the endangered Sleepy Eagle. A donor pledged $1 million to the project provided that the Nature Conservatory was able to raise an additional $1.5 million from other sources. What entry should the Nature Conservatory make at the time of the $1 million pledge?
a) Debit Pledge Receivable $1 million; Credit Unrestricted Revenue $1 million.
b) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Revenue $1 million.
c) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Net Assets $1 million.
d) No entry is made at the time of the pledge.

28. When should a not-for-profit entity recognize pledge revenue that is contingent upon raising a matching amount?
a) When the pledge is made.
b) When the cash is received.
c) When the matching funds have been raised.
d) When the project is completed.

29. A donor pledges $100,000 to the Shakespeare Foundation to be used only to support the summer Shakespeare Theater—an event that has been held every summer for 38 years. This is an example of a(an)
a) Conditional contribution.
b) Unconditional contribution.
c) Restricted contribution.
d) Unrestricted contribution.

30. United Charities accepted a contribution from a donor and agreed to transfer the assets to Aid for Friends, a not-for-profit that provides temporary shelter to the homeless. United Charities should debit cash or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability to Aid for Friends.
d) United Charities should not make an entry.

31. Music Lovers Foundation, a not-for-profit governed by an independent board, was founded to support the Northern State University Choir until such time as the state legislature shall adequately fund the choir. When the Choir is adequately funded by appropriation the Foundation may direct resources to other music projects that it deems acceptable. When Music Lovers accepts a contribution from a donor it should debit cash and/or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability.
d) It should not make an entry.

32. The Save the Animals Foundation received a gift of $500,000 from a donor who wanted the gift used to acquire habitat for endangered snails. The money may be invested but all earnings are restricted to habitat acquisition. During the year all of the gift was invested in corporate securities. At year-end, the securities had a value of $501,0000. The appropriate way to recognize the change in fair value is
a) Debit Investment $1,000; Credit Unrestricted Revenue $1,000.
b) Debit Investment $1,000; Credit Temporarily Restricted Revenue $1,000.
c) Debit Investment $1,000; Credit Permanently Restricted Revenue $1,000.
d) No entry should be made until the securities are sold.

33. Sheridan Public School Foundation had available temporarily restricted gifts in excess of $200,000. The Foundation decided to invest this money temporarily until it needs the funds for the restricted purpose. The donors had made no specific stipulations regarding investment earnings but the Foundation board had voted to use the earnings on the projects for which the gift had originally been restricted. At year-end, the securities had a fair value of $200,500. The appropriate way to recognize the change in fair value is
a) Debit Investment $500; Credit Unrestricted Revenue $500.
b) Debit Investment $500; Credit Temporarily Restricted Revenue $500.
c) Debit Investment $500; Credit Permanently Restricted Revenue $500.
d) No entry should be made until the securities are sold.

34. The Friends of the Library (FOL), a not-for-profit entity, received a gift restricted to acquisition of a special piece of the equipment used to restore books. Late last year FOL acquired the machine at a total cost of $19,000. The machine is estimated to have a useful life of eight years and a salvage value of $3,000. In what fund should FOL make the entry to record the depreciation for the current year?
a) Unrestricted fund.
b) Temporarily restricted fund.
c) Permanently restricted fund.
d) FOL should not recognize depreciation.

35. A not-for-profit would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

PROBLEMS (CHAPTER 12)

1. United Charities, a not-for-profit entity, supports activities for lower-income families. They have regularly engaged in activities such as providing transportation for physically-challenged individuals, providing shelters for the temporarily homeless, providing congregate meals for the homeless, and providing shelters for abused women and children. Record the following transactions. Your account titles should clearly indicate to which class of net assets the entry will be closed or the fund in which the entry is being made. If no entry is required, write “No entry required.”

a. United Charities engaged in a fund-raising campaign which resulted in pledges of $600,000 to support activities of the current year. During the year, United collected $500,000 on these pledges.

b. A local citizen pledged $50,000 to purchase and equip a van to provide transportation for physically challenged individuals. This citizen has donated regularly and there is no reason to believe that this pledge will not be collectible.

c. In prior years, an advocacy group for abused women donated $10,000 to be used to furnish a ‘safe-house’ for abused women and children. During the current year renovation of the safe house was completed and furniture was acquired at a total cost of $15,000.

d. A wealthy benefactor pledges $100,000 to United if United successfully raises a matching amount in a capital asset fund-raising drive being conducted over a 12-month period.

e. $60,000 cash is received from a donor who specifies that the money must be spent to provide educational activities for children who will be living in the ‘safe-house’. It will be next year before the ‘safe-house’ has its first residents.

f. A local attorney has agreed to provide legal services to United on a pro-bona basis. During the current period the attorney provided services for which she would have billed $1,500.

g. Several older housewives provide services at the United Charities congregate meal setting facility. These women work in the kitchen serving meals and cleaning up the kitchen. If these services were not donated they would have to purchased. The value of these services at the prevailing wage rate for similar employees would have amounted to $50,000 for the current year.

h. Fixed assets belonging to United Charities have an original cost of $270,000, an estimated salvage value of $70,000, and an estimated useful life of 20 years. Record depreciation if applicable.
2. The Heritage Art Museum, a not-for-profit entity specializing in art items created by natives of the Pacific Northwest, has a December 31 fiscal year-end. The Museum has a policy of not capitalizing collection items. Your entry should clearly indicate to which class of net assets the account would be closed, or in which fund the entry is being made. If no entry is required, write “No entry required.”

a. During the current year the Museum received admissions fees in cash $500,000.

b. Citizens of the local community are encouraged to participate in a program called ‘Friends of the Museum.’ For a yearly contribution of $25 per family, a family is entitled to free admission to the Museum during the calendar year. A ‘Friend of the Museum; also receives a monthly one-page newsletter announcing upcoming events. At year-end, there were 1000 members in the ‘Friends of the Museum.’

c. During the current year the Museum incurred salary expense of $1 million of which $60,000 remains unpaid at year end.

d. During the year the Museum incurred operating expenses of $400,000 of which $30,000 remains unpaid at year end. Of the $400,000, $50,000 was used to buy supplies of which $20,000 remains on hand at year-end.

e. Office equipment owned by the Museum has a historical cost of $100,000, salvage value of $20,000 and can be depreciated over 8 years on the straight-line basis.

f. During the year the Museum conducted a fund-raising drive to raise money to acquire new art items for the Museum. The Museum received pledges of $200,000 of which the Museum had collected $150,000 by year-end and expected to ultimately collect another $20,000.

g. The Museum had a small portfolio of investments in equity securities.. At the beginning of the year the portfolio had a fair value of $60,000. During the year the Museum collected $3,000 in dividends on the securities. At year-end the portfolio had a market value of $61,000.

h. During the year a citizen died and willed his wonderful collection of native art to the Museum. The appraised value of the collection was $600,000.

i. To balance its collection, the Museum sold two of its collection items for $250,000 which approximates fair value. These items had a historical cost to the Museum of $10,000.

j. The proceeds of the sale were used to acquire two new items at a cost of $310,000.

ESSAYS (CHAPTER 12)

1. For each of the cases below state whether or not the contributed services would be recognized, how much would be recognized, and how it would be recognized. Explain your answer in terms of the existing standard. Also explain why, in your opinion, the standard permits/prohibits recognition of this particular type of contribution.

a. A non-denominational church votes to construct a new educational wing on their existing facility. The church will hire an architect to design the new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor for the construction. Labor donated by members who have construction experience or who are considered professional craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their prevailing wage rates is $700,000. Labor donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when completed is $3 million. The architect was paid $700,000, the construction supervisor was paid $50,000 and the materials purchased for use in the building cost $1 million.

b. An investment advisor, a member of the Board of a not-for-profit entity, provides pro bono investment advise to the NFP. The NFP does not have a particularly large investment portfolio and without the advise of the Board member the NFP would probably invest its idle cash in certificates of deposits at an insured commercial bank to protect itself against loss of its principal. If the investment advisor had provided similar services to his customers he would have charged $2,000.

c. Members of a religious order provide professional nursing services for a health-care facility that is run by their order. The members are not compensated but their order provides lodging, food, and other necessities. The cost of the lodging, food, etc., is paid by the health-care entity and classified as Nursing Service Expense. At the end of the year the balance in the Nursing Service Expense account is $3 million. The value of the nursing services provided, measured at the prevailing wage for nurses, is $5 million.

2. A generous benefactor pledges $1 million to The R. J. Smith Foundation, a not-for-profit entity that promotes the arts. The gift is to be used to provide scholarships for talented musicians at a music camp operated by the Foundation. The gift was given in August, 2002 to support the Summer 2003 music program. The Foundation Director argues that the gift is a conditional restricted gift and therefore cannot be recognized as revenue in 2002. The accountant argues that the gift is an unconditional restricted gift and must be recognized in the current year. What is the basis for the Director’s argument? What is the basis for the accountant’s argument? In your answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

Chapter 13

Special Issues for Not-for-Profit Health Care Providers and Institutions of Higher Education

TRUE/FALSE (CHAPTER 13)

1. The statement of financial position of a not-for-profit health care organization should distinguish among unrestricted, temporarily restricted, and permanently restricted net assets.

2. The statement of activities of a not-for-profit health care organization should classify the revenues as unrestricted, temporarily restricted, or permanently restricted, but should report expenses only as decreases in unrestricted resources.

3. Temporarily restricted funds related to plant and equipment generally account only for resources restricted to their purchase or construction, not for the plant and equipment itself, which are typically reported in the general operating fund.

4. Not-for-profit health care organizations must use exactly three funds to account for the three categories of restrictiveness.

5. In classifying expenses in the statement of activities of a not-for-profit health care organization, all expenses are reported exclusively within the temporarily restricted category.

6. Unlike businesses, not-for-profit health care providers often serve patients who they know will be unable to pay the amounts billed.

7. According to the AICPA audit guide, Health Care Organizations, revenue must be recorded using the patient discharge method.

8. The Hill-Burton Act stipulates that hospitals receiving federal construction funds must provide a certain amount of charity care.

9. Government hospitals are subject to the same FASB standards as private not-for-profit health care organizations.

10. Private not-for-profit colleges and universities are subject to the same FASB standards as other not-for-profit entities.

MULTIPLE CHOICE (CHAPTER 13)

1. For a not-for-profit hospital, which of the following financial statements is NOT required?
a) Statement of financial position.
b) Statement of activities.
c) Statement of cash flows.
d) Statement of functional expenses.

2. For a not-for-profit college or university, which of the following categories of net assets is NOT appropriate in its external financial statements?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) None. All of the above are appropriate.

3. New College, a private college, received a $1 million donation. The donor specified that the principal of her gift could not be used for program activities but the earnings on the principal must be used to provide scholarships to academically qualified students in the business school. The $1 million gift would increase which of the following categories of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) and (c).

4. Intermountain Hospital, a not-for-profit health care provider, issued $70 million in term bonds to finance construction of a new wing at its main hospital. Terms of the bond issue require that $5 million of the proceeds of the bond issue be invested in U.S. government securities. The $5 million must be held until maturity of the bonds. The $5 million will increase which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) or (c).

5. During the current year, Jones University received a $50,000 gift from an alumnae who specified that it must be used to pay travel costs for faculty to attend health care conferences in foreign countries. During the year the university spent $8,000 to support travel to a health care conference in Italy. The $8,000 disbursement will cause a NET decrease in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Cannot be determined.

Use the following information to answer #6 and #7.
Kale Hospital, a not-for-profit entity, received a pledge from a donor in support of a fund raising effort by the Hospital to finance construction of a new facility for cancer treatment. The donor promised to pay $1 million in equal annual installments of $100,000 over the next 10 years. The present value of the gift at the risk-free interest rate is $736,000.

6. The amount of unrestricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

7. The amount of restricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

8. An accountant has encountered a perplexing financial reporting issue related to the hospital for which she is preparing financial statements. The issue is not specifically addressed by FASB statements. To which of the following sources would the accountant probably look for industry-specific guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Health Care Organizations.
d) Pronouncements of the HFMA or AHA.

9. Which of the following entities should recognize depreciation expense on its operating statement?
a) Not-for-profit University.
b) Not-for-profit Foundation.
c) Not-for-profit Hospital.
d) All of the above.

10. In prior years, a not-for-profit hospital received funds from a donor who restricted the use of those funds to providing nursing scholarships. During the current year $8,000 of scholarships were awarded. These scholarships should be reported
a) As expenses in the unrestricted fund.
b) As reductions in the revenue section in the unrestricted fund.
c) As expenses in the temporarily restricted fund.
d) As expenses in the permanently restricted fund.

11. During the current year, St. Mary’s Hospital (a not-for-profit entity) earned, based on its normal billings rate, $1 million in patient service revenues. Many of these patients belong to a health plan that has an established pay schedule. Based on the specific services rendered to members of the plan, the hospital estimates that $.05 million will not be collectible from the plan or the patient. Some of the patients are Hospital employees. These employees are given a 50% discount on the services rendered. Employee discounts for the current year total $.01 million. Some of the patients are uninsured and the hospital estimates, that of the amount billed to the uninsured patients, $.2 million will not be collectible (bad debts). The amount of net patient service revenues for St. Mary’s Hospital for the current year is
a) $1 million.
b) $.94 million.
c) $.87 million.
d) $.74 million.

12. A consortium of physicians agree to provide services to the employees of a large County government. The agreement calls for monthly payments from the County to the consortium in the amount of $100,000 per month. County employees are not billed for services rendered by the consortium. All County employees are required to use the consortium under their health care program (any services rendered to County employees by other physicians are not covered under the health plan). During the period the consortium performed services for County employees for which it would have billed $85,000. The consortium referred patients to other health care providers for services they could not perform. The consortium estimates that it will be billed $5,000 for those services. The amount of revenue that should be recognized by the consortium is
a) $100,000.
b) $95,000.
c) $85,000.
d) $80,000.

13. A hospital estimates, based on past experience, that it will incur $5 million in malpractice claims as a result of services rendered in the current period. The hospital carries a malpractice insurance policy with a yearly $2 million deductible clause. The amount that should appear on its year-end financial statement as Claims Expense (Loss) should be
a) $0.
b) $2 million.
c) $3 million.
d) $5 million.

14. A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $150,000 for the 2-year policy payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $40,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $50,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be
a) $75,000.
b) $115,000.
c) $150,000.
d) $240,000.

15. An accountant has encountered a perplexing financial reporting issue related to the private college for which he is preparing financial statements. The issue is not specifically addressed by FASB Statements. To what standards would the accountant now look for guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Audits of Colleges and Universities and/or AICPA SOP 74-8, Financial Accounting and Financial Reporting by Colleges and Universities.
d) College textbooks.

16. A private not-for-profit college would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

17. For financial reporting purposes, government hospitals are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

18. For financial reporting purposes, private not-for-profit health care providers are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

19. For financial reporting purposes, state supported colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

20. For financial reporting purposes, private not-for-profit colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

PROBLEMS (CHAPTER 13)

1. St. Anthony’s hospital is a private not-for-profit entity that provides health care services to the citizens in the small rural community in which it is located. The most recent construction at the Hospital was financed using Hill-Burton funds. During the current month, St. Anthony’s engaged in the following transactions. Using the following information make the appropriate entries for St. Anthony’s for the current month.

a. The Hospital would have billed $1.2 million for services rendered to in-patients. The $1.2 million is based on the hospital’s established billing rate. Of this amount $800,000 will be billed to Delta Medical Group, a third-party payor that insurers many state employees, $150,000 will be billed to uninsured patients, $200,000 is provided to indigents and will be considered charity care, and $50,000 was for services rendered to Hospital employees.

b. Based on prior experience with uninsured patients, the Hospital estimates that $60,000 of the $150,000 will be uncollectible.

c. The Hospital recognizes the value of charity services rendered.

2. Richards College is a not-for-profit college. Record the following transactions for Richards College. The College has a June 30 fiscal year.

a. Tuition revenue for the Fall semester 2002 (August – December) was $4 million; tuition for the Spring semester 2003 (January – May) was $3.8 million; tuition for the Summer semester 2003 (June 1-August 15) was $1 million. All tuition received in cash.

b. Faculty salaries for the Fall semester were $3 million; for the Spring semester, $2.9 million; for the Summer semester were $.5 million. All salaries are paid at the end of the month earned. Salaries earned in summer are June $.2 million, July $2 and August .5 million.

c. During June $3.2 million of tuition applicable to the Fall 2003 was received in cash.

d. Fixed assets of the University have a historical cost of $120 million, estimated salvage value of $20 million and an estimated useful life of 50 years.

ESSAYS (CHAPTER 13)

1. Alpha Hospital is a recipient of Hill-Burton funds and must provide some hospital care for which it will not be compensated. During the current year Alpha Hospital provided $1 million in charity care. What is the current financial reporting requirement for charity care? Do you agree or disagree with the current financial reporting requirement? Why or why not? If you do not agree, how do you think charity care should be reported? If you agree with the current standards, what alternative reporting requirements do you believe will be proposed by those who do not agree with the current standards?

2. Neither the FASB nor the GASB pronouncements, nor the current AICPA not-for-profit audit guide, addresses the issue of tuition revenue. Thus, the 1973 AICPA college and university guide remains the most authoritative source of guidance for both government and not-for-profit institutions. What is the directive on how to report revenues and expenditures of an academic term, such as a summer session, which is conducted over a fiscal year-end?

Chapter 14

Auditing Governments and Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 14)

1. In 1972, the GAO issued Government Auditing Standards known as the Blue Book.

2. Performance audits are intended to determine whether an entity’s financial statements are presented fairly in accordance to GAAP.

3. Agencies that provide funds to governments may stipulate that the audit be conducted in accordance with generally accepted government auditing standards (GAGAS).

4. GAO standards do not mandate a peer review process for audit organizations.

5. The Single Audit Act applies to organizations receiving more than $500,000 in federal assistance under more than one program be subject to a single audit.

6. A single audit has two main components: an audit of the financial statements and an audit of federal financial awards.

7. In a single audit, auditors are expected to provide an opinion on the financial statements and on the schedule of expenditures of federal awards.

8. Performance audits are most commonly conducted by external auditors.

9. The Sarbanes-Oxley Act has had no impact on governmental auditing.

10. Performance audits may be conducted by staff without training in accounting.

MULTIPLE CHOICE (CHAPTER 14)

1. In reporting the results of a performance audit, it is appropriate for the auditors to
a. conjecture as to the reasons for the program’s failure to achieve desired results
b. include the auditors’ response to management’s objections to the auditors’ findings
c. provide recommendations as to how the program can be improved
d. all of the above.

2. Government Auditing Standards must be adhered to in all financial audits except of
a. state and local governments
b. federal agencies
c. federally chartered banks
d. public corporations

3. In discerning the objectives of a program to be audited, the auditors should give the least credibility to
a. the legislation creating the program
b. the organization’s program budget
c. the organization’s mission statement and strategic plan
d. comments by the lower-level employees who actually depend on the program for their livelihoods.

4. ‘‘Generally accepted government auditing standards’’ (GAGAS) refers to standards incorporated in
a. the Yellow Book
b. the Yellow Book and OMB Circular A-133
c. the Yellow Book and the AICPA’s Professional Standards
d. the Yellow Book OMB Circular A-133, and the AICPA’s Professional Standards

5. Which of the following statements is incorrect about GAO standards pertaining to performance audits?
a. The GAO mandates that programs be audited annually by accounting trained professionals
b. Performance audits are normally carried out by internal audit departments
c. Performance audits focus on specific programs
d. The GAO does not specify when and how often a program, must be audited

6. Government Auditing Standards characterizes government engagements into which of the following three categories?
a. financial audits, compliance audits, and performance audits
b. financial audits, operational audits, and performance audits
c. financial audits, attest engagements, and performance audits
d. financial audits, efficiency and effectiveness audits, and compliance audits

7. The purpose of this is to avoid duplication of efforts in conducting governmental audits
a. AICPA’s Professional Standards
b. GAO’s Government Auditing Standards
c. Single Audit Act
d. OMB Circular A-133

8. The Yellow Book’s general standards are issued by the
a. GAO
b. FASB
c. AICPA
d. IRS

9. Which of the following is not reported upon in the Schedule of Findings and Questioned Costs?
a. reportable conditions related to internal control
b. material noncompliance with provisions of laws, regulations, contracts, or grant agreements
c. material examples of inefficiency and ineffectiveness in carrying out federally funded programs
d. federally reimbursed expenditures that are not adequately documented

10. Which of the following is not a General Auditing Standard for financial audits?
a. professional judgment
b. financial stability
c. independence
d. competence

11. Which of the following is a Yellow Book standard in respect to independence?
a. auditors may only audit one government agency during a fiscal year
b. auditors should not audit their own work
c. auditors may not advise in respect to computer installation
d. auditors may not audit public corporations

12. Federal funds must be used only for activities that are within the scope of the grant would be a(n)
a. optional activity
b. Yelllow Book mandate
c. allowable activity
d. prohibited activity

13. This law requires that the wages of laborers and mechanics employed by the contractors of federally funded projects be paid at prevailing local wage rates.
a. Davis-Bacon Act
b. Sarbanes-Oxley Act
c. Federal Wage and Hour Law
d. IRS Act

14. The process of specifically directing federal funds to a particular program is called:
a. allocation
b. earmarking
c. identification
d. subversion

15. Per the GAO standards, an auditor’s working papers must
a. be made public unless they contain information that would be harmful to national security
b. contain sufficient information to convince an auditor having no previous connection with the audit that the evidence supports the auditor’s conclusions and judgments
c. be retained by the auditor for a period of no less than 10 years
d. include documentation that the individual auditors on the engagement have satisfied the standards’ continuing professional education requirements

16. Auditors who perform government audits must complete 80 hours of continuing professional education every two years, of which ____ hours must be related directly to government auditing.
a. 24
b. 30
c. 16
d. 8

PROBLEMS (CHAPTER 14)

1. In a program review, auditors need to identify compliance requirements that are specific to the program itself and that are applicable to all federal award recipients. Identify and describe three general compliance requirements.

2. What reports result from single audits?

ESSAYS (CHAPTER 14)

1. How does Sarbanes-Oxley and IRS regulations affect governments and not-for-profits?

2. What are some questions that need to be addressed in assessing an ethical conflict?

Chapter 15

Financial Analysis

TRUE/FALSE (CHAPTER 15)

1. For financial analysis purposes, the Comprehensive Annual Financial Report alone can provide all the information resource providers and other interested parties might need.

2. A government’s economic condition is a broader concept than its financial position.

3. For financial analysis purposes, nonfinancial considerations are at least as important as the financial statements.

4. Bond rating agencies usually require governments to supplement their CAFRs with additional documents, such as budgets, long-range forecasts and plans, and economic reports.

5. By law, governments are prohibited from outsourcing certain activities such as clerical operations, and repair and maintenance services.

6. In the future, e-commerce will affect governments, just as it is now transforming businesses.

7. Budgets are generally on a cash or near-cash basis.

8. Governmental budgets must adhere to GAAP.

9. A widely used rule of thumb holds that two consecutive years of operating deficits connote serious fiscal stress.

10. For many analytical purposes, revenues and expenditures are best expressed per capita.

MULTIPLE CHOICE (CHAPTER 15)

1. The city council of the City of Highland Hills has adopted a policy of aggressively pursuing grants and other resource inflows from other levels of government. Over the past several years, the proportion of total City revenues that comes from other levels of government has been steadily increasing. As a consequent of these increased revenues, the City has begun offering a number of new services to the citizens of the City. In assessing the financial condition of the City of Highland Hills, an analyst would conclude which of the following?
a) The increasing reliance on intergovernmental revenues has increased the financial viability of the City.
b) The increasing reliance on intergovernmental revenues is a negative fiscal characteristic.
c) The increasing reliance on intergovernmental revenues is irrelevant in assessing the financial condition of the City.
d) The increasing reliance on intergovernmental revenues is a sign of poor management on the part of the City Council.

2. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) A high, or increasing, ratio of intergovernmental revenues to total revenues.
b) A low percentage of restricted revenues to total revenues.
c) A high proportion of one-time revenues to total revenues.
d) A low ratio of property tax revenues to total revenues.

3. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) An increasing amount of payroll costs.
b) An increasing amount of expenditures for specific functions.
c) An increasing percentage of nondiscretionary expenditures.
d) An increasing percentage of discretionary expenditures.

4. Which of the following would generally be considered to be an indication of future economic problems for a City?
a) A decreasing percentage of revenue raised by the City as a proportion of total appraised value of property.
b) A decreasing percentage of revenue raised by the City as a proportion of median family income.
c) An increasing population base.
d) An increasing industrial base in a variety of industries.

5. Accountants are actively involved in collecting and analyzing data to be used by public policy makers. Which of the following other groups might also be involved in the data collection and analysis process?
a) Statisticians.
b) Economists.
c) Program managers.
d) All of the above.

6. Which of the following groups is least likely to be involved in evaluating the efficiency and effectiveness of government programs?
a) Accountants.
b) Legislators.
c) Economists.
d) Statisticians.

7. Which of the following is an example of an efficiency measure?
a) Cost per client placed in an appropriate job.
b) Cost per ton of garbage collected.
c) Cost per gallon of water suitable for drinking.
d) Cost per child reading at grade level.

8. A private mail and package delivery service boasts that it can deliver the same material as the government-run mail and package delivery service for a fraction of the cost of the government-run service. Which of the following is the best course of action for the government?
a) The government should contract-out all of its mail and package delivery service.
b) The government should develop laws and regulations limiting competition with government-run services.
c) The government should renegotiate their contract with the labor union.
d) The government should determine if costs incurred by the government-run service are negatively impacted by social policy decisions made by the legislative body.

9. Which of the following events would be evidence that the audience criterion of a not-for-profit joint program and fund-raising activity has NOT been met? Each activity included both a program activity and a fund-raising solicitation.
a) American Heart Association mailed pamphlets encouraging heart-healthy diets to all telephone subscribers in a geographic area.
b) Citizen Against Centennial Highway conducted a door-to-door campaign in the area of a proposed new Interstate highway asking citizens to writing to federal, state, and local elected officials expressing opposition to the proposed location.
c) Citizens For 1% (an initiative to limit property tax rates) conducts a mass mailing to all homeowners in the City.
d) Citizens for Term Limits, a not-for-profit group organized to push for term limits for all elected officials, conducts a mailing to encourage citizens to write their legislatures expressing support for term limits. The mailings went to all citizens with incomes greater than $50,000.

10. Which of the following events would be evidence that the content criterion of a not-for-profit joint program and fund-raising activity had not been met? Each activity included both a program activity and a fund-raising solicitation.
a) A hospital sends a copy of the annual financial statement to all trustees, employees and previous donors.
b) Preserve the River mails information on the effects that dams on the river have to the river ecosystem.
c) American Heart Association sends information on heart healthy diets and encourages healthy lifestyles.
d) Citizens for Tax Credits, a not-for-profit entity supporting tax credits for families whose children attend private schools, conducts a mass mailing encouraging a letters to the editor letter-writing campaign.

11. If an activity that involves fund-raising as well as programmatic, management, or general functions meets one of the three broad criteria then all expenses of the joint activity must be
a) Charged to fund-raising.
b) Charged to programmatic.
c) Charged to management and general.
d) Allocated between fund-raising and either programmatic or management and general.

12. In performing a financial analysis of a city, the financial analyst
a) Needs only the financial statements.
b) Must combine financial statement information with financial information from other sources.
c) Must combine financial statement information with both financial and nonfinancial information from other sources.
d) Needs only nonfinancial information from other sources.

13. A government’s financial position is represented by
a) The status of its assets, liabilities, and net assets, as presented in its statement of net assets.
b) The status of its revenues and expenses, as presented in its statement of activities.
c) Both (a) and (b).
d) Neither (a) nor (b).

14. A government’s economic condition is a(n) ____________ concept than its financial position.
a) Easier.
b) Broader.
c) Narrower.
d) Equal to.

15. A government’s fiscal effort is the extent to which it is taking advantage of its
a) Taxpayers.
b) Governing bodies.
c) Fiscal capacity.
d) Employees.

16. Which of the following statements is true regarding the ratio analysis of Intergovernmental Revenues to Total Revenues?
a) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a positive fiscal characteristic.
b) A low, or, decreasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
c) A low, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
d) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.

17. Which of the following statements is true regarding the ratio analysis of Restricted Revenues to Total Operating Revenues?
a) Higher percentages of restricted revenues are preferred to low percentages.
b) Higher percentages of total operating revenues are preferred to low percentages.
c) Lower percentages of restricted revenues are preferred to high percentages.
d) Lower percentages of total operating revenues are preferred to high percentages.

18. Which of the following statements is true regarding the ratio analysis of Property Tax Revenues to Total Operating Revenues?
a) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a negative attribute.
b) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a positive attribute.
c) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a negative attribute.
d) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a positive attribute.

19. Which of the following statements is true regarding the ratio analysis of Nondiscretionary Expenditures to Total Expenditures?
a) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
b) The higher the percentage of nondiscretionary expenditures, the more flexibility the government has to reduce (or limit increases in) spending.
c) The lower the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
d) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to increase spending.

20. Which of the following statements is true regarding the formula most often used by governments for the liquidity ratio?
a) Cash divided by current liabilities.
b) Receivables divided by current liabilities.
c) Receivables divided by payables.
d) Cash, short-term investments, and receivables divided by current liabilities.

PROBLEMS (CHAPTER 15)

1. Based on the data from the general fund presented below, assess (as best you can) the financial/fiscal condition of the City of Billmont. As much as possible, justify your answer with quantitative data.
(000 omitted)
Population (increasing slowly) 86
Value of taxable property $123,000
Total general fund revenues $ 23,000
General Fund tax revenue $ 11,000
Intergovernmental revenues $ 4,000
Miscellaneous revenues $ 8,000
Total General Fund expenditures $ 23,000
Current expenditures $ 21,300
Capital outlay $ 1,600
Debt service expenditures $ 100
Operating transfer in $ 600
Operating transfer out ($ 4,600)
Unreserved fund balance $ 13,000
Cash and investments $ 15,000
Total liabilities $ 1,400

2. For each of the following independent cases, indicate whether the costs of the joint activity should be considered fund-raising or not. Justify your decision based on the AICPA criteria.

a. Crowley’s Ridge Girl Scout Council conducted a mass mailing to all parents of girls enrolled in public school in their Council area. The mailing included information about girl scouting, benefits to girls participating in girl scouting, and information on how to enroll girls in scouting. The mailing also included a solicitation for donations and a return envelope for donations.

b. The State University Foundation conducted a mailing to all alumni of the University including an eight-page glossy report highlighting major accomplishments of University faculty and students during the past year. Also included was a solicitation for donations, a detailed list of proposed projects to be funded by donation, and a return envelope in which to mail the donation.

c. The Youth Ranch Foundation supports a residential program for troubled at-risk youth. The Foundation hired an organization to help them design a brochure to be mailed to all telephone subscribers within a 300-mile radius of the Ranch. The brochure depicts the Ranch facilities, explains how it serves the youth, and lists the names of supporters of the Ranch, including most of the law enforcement officers in the area. Also included is an appeal for donations and a return envelope. The designer of the brochure will be paid a percentage of funds raised by the mailing.

d. The Committee for Social Action sent a mass mailing to registered voters explaining the need for maintaining certain benefits for children whose parents will become ineligible for welfare benefits under proposed changes in the State welfare laws. The mailing includes copies of form letters to be mailed to State legislators and includes addresses for those legislators. The mailing includes a solicitation for donations and a return envelope.

ESSAYS (CHAPTER 15)

1. What is the difference between fiscal capacity and fiscal effort?

2. For a not-for-profit organization, what is the difference between operational efficiency and operational effectiveness?

ACC 401 Week 11 Final Exam – Strayer University New

ACC/401 Week 11 Quiz Final Exam – Strayer

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Quiz (Chapter 15 – 16) Final Exam (Chapter 5, 8, and 10 – 16)

Chapter 5

Allocation and Depreciation of Differences Between Implied and Book Value

Multiple Choice

1. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.

2. Long-term debt and other obligations of an acquired company should be valued for consolidation purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.

3. On January 1, 2010, Lester Company purchased 70% of Stork Corporation’s $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork’s identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.

4. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
a. 1
b. 2
c. 3
d. Both 1 and 2

5. If the fair value of the subsidiary’s identifiable net assets exceeds both the book value and the value implied by the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.

6. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded
1. on the subsidiary’s books.
2. on the parent’s books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3

7. The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.

8. The SEC requires the use of push down accounting when the ownership change is greater than
a. 50%
b. 80%
c. 90%
d. 95%

9. Under push down accounting, the workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.

10. In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of acquisition.

11. On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company. Surge ‘s balance sheet at November 30, 2010, showed a book value of $8,000,000. Additionally, the fair value of Surge’s property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet caption “Goodwill” in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.

12. Goodwill represents the excess of the implied value of an acquired company over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.

13. Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Scooter’s identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Scooter for Year 3 was
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.

14. Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000. All excess was attributable to plant assets with a 10-year life. Strumble Company made $30,000 in 2010 and paid no dividends. Porter Company’s separate income in 2010 was $375,000. Controlling interest in consolidated net income for 2010 is:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.

15. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only.
d. the complete equity method is in use.

16. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.

Use the following information to answer questions 17 through 20.

On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate balance sheet data for the companies at the combination date are given below:

Saturn Co. Saturn Co.
Pandora Co. Book Values Fair Values

Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000

Accounts payable $156,000 $105,000 $105,000
Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.

17. What amount of inventory will be reported?
a. $125,000
b. $132,750
c. $139,250
d. $144,000

18. What amount of goodwill will be reported?
a. ($20,000)
b. ($25,000)
c. $25,000
d. $0

19. What is the amount of consolidated retained earnings?
a. $204,000
b. $209,250
c. $260,250
d. $279,000

20. What is the amount of total assets?
a. $921,000
b. $1,185,000
c. $1,525,000
d. $1,195,000

21. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sensible’s identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sensible for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.

22. Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2010 and paid no dividends. Primer Company’s separate income in 2010 was $625,000. The controlling interest in consolidated net income for 2010 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.

Use the following information to answer questions 23 through 25.

On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Swimmer Co. Swimmer Co.
Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000

Accounts payable $206,000 $142,000 $142,000
Capital stock 800,000 300,000
Retained earnings 272,000 100,000
Total liabilities & equities $1,278,000 $542,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.

23. What amount of inventory will be reported?
a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.

24. What amount of goodwill will be reported?
a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.

25. What is the amount of total assets?
a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.

Problems

5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2010. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date.

The following values were determined for Standards Corporation on the date of purchase:

Book Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000

Required:
A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper.

B. Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate the difference between implied and book value.

5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1 2010. At that time Sleeper Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeper Company on January 1, 2010, showed the following:

Book Value Fair Value
Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000

The equipment had a remaining useful life of ten years. Sleeper Company reported $240,000 of net income in 2010 and declared $60,000 of dividends during the year.

Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2010.

5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company’s assets and liabilities were equal to their fair values except for land and bonds payable. The land’s fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond principal is $600,000 and the current yield rate on similar bonds is 8%.

Required:
Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and depreciate the difference between implied and book value.

Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271

5-4 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2010. On this date the book values and fair values of Stafford Corporation’s assets and liabilities were as follows:
Book Value Fair Value
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000

Accounts Payable $ 250,000 $250,000
Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000

Required:
Prepare a schedule showing how the difference between Stafford Corporation’s implied value and the book value of the net assets acquired should be allocated.

5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000. The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows:
Book Value Fair Value
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000

The property and equipment had a remaining life of 6 years on January 1, 2010, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2010. Perez Company records its investment in Schmidt Company using the cost method.

Required:
Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to:

A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.

5-6 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000. On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following:

Book Value Fair Value
Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2010 and the remaining half was sold in 2011. Schell Company reported net income of $240,000 in 2010 and $300,000 in 2011. No dividends were declared or paid in either year. Page Company uses the cost method to record its investment in Schell Company.

Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011.

5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1, 2010. On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.

The balances in Spector Company’s capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively.

Required:
In general journal form, prepare the entries on Spector Company’s books to record the effect of the pushed down values implied by the acquisition of its stock by Paddock Company assuming that:

A values are allocated on the basis of the fair value of Spector Company as a whole imputed from the transaction.

B values are allocated on the basis of the proportional interest acquired by Paddock Company.

5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.

Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December 31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruitt Corp. has accounted for its investment in Soto using the partial equity method of accounting.

Required:
Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011.
Pruitt Corporation and Soto Corporation
Consolidated Statements Workpaper
at December 31, 2011

Eliminations
Pruitt Corp. Soto Corp. Debit Credit Consolidated Balances
INCOME STATEMENT
Sales 618,000 180,000
Equity from Subsidiary Income 36,000
Cost of Sales (450,000) (90,000)
Other Expenses (114,000) (54,000)
Net Income to Ret. Earn. 90,000 36,000
Pruitt Retained Earnings 1/1 72,000
Soto Retained Earnings 1/1 3,000
Add: Net Income 90,000 36,000
Less: Dividends (60,000) (12,000)
Retained Earnings 12/31 102,000 54,000
BALANCE SHEET
Cash 42,000 21,000
Inventories 63,000 45,000
Land 33,000 18,000
Equipment and Buildings-net 192,000 165,000
Investment in Soto Corp. 240,000

Total Assets 570,000 249,000
LIA & EQUITIES Liabilities 168,000 45,000
Common Stock 300,000 150,000
Retained Earnings 102,000 54,000
Total Equities 570,000 249,000

5-9 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock Company for $570,000. On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000.

On the date of acquisition, the assets of Sherlock Company had the following values:

Fair Market
Book Value Value
Inventories $ 90,000 $165,000
Plant and equipment 150,000 180,000

All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption.

Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000.
Prescott Company uses the complete equity method to account for its investment in S Company.

Required:

A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries as of December 31, 2010.
C. Compute the amount of equity in subsidiary income recorded on the books of Prescott Company on December 31, 2010.
D. Compute the balance in the investment account on December 31, 2010.

Short Answer

1. When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.

2. Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry. Briefly explain the concept of push down accounting.

Questions from the Textbook

1. Distinguish among the following concepts:(a)Difference between book value and the value implied by the purchase price.(b)Excess of implied value over fair value.(c)Excess of fair value over implied value.(d)Excess of book value over fair value.

2. In what account is the difference between book value and the value implied by the purchase
price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded?

3. How do you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary?

4. The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?

5. What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency?

6. P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000.
At what amount should the land of S Company be included in the consolidated balance sheet?
At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an80% interest in S Company rather than a 100%interest?

Business Ethics Question from the Textbook

Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money. I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it. I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores. I thanked him for the information but did not buy the stock. Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling. It was clear that I had missed an opportunity to make a lot of money … I don’t know to this day whether or not that would have been insider trading. How-ever, I have never gone home at night and asked my wife if the SEC called. From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999.
Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend your position.

Chapter 8

Changes in Ownership Interest

Multiple Choice

1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a
a. debit to Subsidiary Income Sold.
b. debit to Equity in Subsidiary Income.
c. credit to Equity in Subsidiary Income.
d. credit to Subsidiary Income Sold.

2. A parent company may increase its ownership interest in a subsidiary by
a. buying additional subsidiary shares from third parties.
b. buying additional subsidiary shares from the subsidiary.
c. having the subsidiary purchase its shares from third parties.
d. all of these.

3. If a portion of an investment is sold, the value of the shares sold is determined by using the:
1. first-in, first-out method.
2. average cost method.
3. specific identification method.
a. 1
b. 2
c. 3
d. 1 and 3

4. If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a price less than their book value:
1. total noncontrolling book value interest increases.
2. the controlling book value interest increases.
3. the controlling book value interest decreases.
a. 1
b. 2
c. 3
d. 1 and 3

5. If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the parent’s interest in the subsidiary may
a. increase.
b. decrease.
c. remain the same.
d. increase, decrease, or remain the same.

6. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets
a. increasing.
b. decreasing.
c. remaining unchanged.
d. increasing, decreasing, or remaining unchanged.

7. The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling interest percentage at the
a. beginning of the year times subsidiary stockholders’ equity amounts.
b. beginning of the year times consolidated stockholders’ equity amounts.
c. end of the year times subsidiary stockholders’ equity amounts.
d. end of the year times consolidated stockholders’ equity amounts.

8. Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a:
1. credit to Equity in Subsidiary Income.
2. debit to Subsidiary Income Sold.
3. debit to Equity in Subsidiary Income.
a. 1
b. 2
c. 3
d. both 1 and 2

9. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000

Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If Polk Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Sloan Company account by
a. $562,500.
b. $590,625.
c. $675,000.
d. $150,000.
e. Some other account.

10. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is prepared should increase (decrease) the Investment in Sloan Company by
a. ($140,625).
b. $140,625.
c. ($112,500).
d. $192,000.
e. None of these.

11. On January 1, 2006, Parent Company purchased 32,000 of the 40,000 outstanding common shares of Sims Company for $1,520,000. On January 1, 2010, Parent Company sold 4,000 of its shares of Sims Company on the open market for $90 per share. Sims Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000

The difference between implied and book value is assigned to Sims Company’s land. The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is
a. $68,000.
b. $170,000.
c. $96,000.
d. $200,000.
e. None of these.

12. On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000 outstanding common shares of Stewart Company for $1,140,000. On January 1, 2010, Patterson Corporation sold 3,000 of its shares of Stewart Company on the open market for $90 per share. Stewart Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 300,000 $ 300,000
Other contributed capital 300,000 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000

The difference between implied and book value is assigned to Stewart Company’s land. As a result of the sale, Patterson Corporation’s Investment in Stewart account should be credited for
a. $165,000.
b. $206,250.
c. $120,000.
d. $142,500.
e. None of these.

13. On January 1, 2006, Peterson Company purchased 16,000 of the 20,000 outstanding common shares of Swift Company for $760,000. On January 1, 2010, Peterson Company sold 2,000 of its shares of Swift Company on the open market for $90 per share. Swift Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Swift Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a workpaper for the preparation of consolidated statements on December 31, 2010, would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
e. None of these.

14. On January 1 2010, Paulson Company purchased 75% of Shields Corporation for $500,000. Shields’ stockholders’ equity on that date was equal to $600,000 and Shields had 60,000 shares issued and outstanding on that date. Shields Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.

Assume that Paulson Company purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 92%
b. 87%
c. 80%
d. 100%

15. On January 1 2010, Powder Mill Company purchased 75% of Selfine Company for $500,000. Selfine Company’s stockholders’ equity on that date was equal to $600,000 and Selfine Company had 60,000 shares issued and outstanding on that date. Selfine Company Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.

Assume Selfine Company sold the 15,000 shares to outside interests, Powder Mill Company’s percent ownership would be:
a. 33 1/3%
b. 60%
c. 75%
d. 80%

16. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
a. $9,000 $6,000
b. $9,000 $15,000
c. $15,000 $6,000
d. $15,000 $15,000

17. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would be the balance in the Investment of S Corporation account on December 31, 2010?
a. $300,000.
b. $225,000.
c. $279,000.
d. $261,000.

18. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased:
a. at a price equal to book value.
b. at a price below book value.
c. at a price above book value.
d. will not show an increase.

Use the following information for Questions 19-21.

On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding common shares of Self Company for $760,000. On January 1, 2010, Perk Company sold 2,000 of its shares of Self Company on the open market for $90 per share. Self Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Self Company’s land.

19. The amount of the gain on sale of the 2,000 shares that should be recorded on the books of Perk Company is
a. $34,000.
b. $85,000.
c. $48,000.
d. $100,000.
e. None of these.

20. As a result of the sale, Perk Company’s Investment in Self account should be credited for
a. $110,000.
b. $137,500.
c. $80,000.
d. $95,000.
e. None of these.

21. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31, 2010 would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.

22. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.

Assume that P Corporation purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 62 1/2%.
b. 75%
c. 79 1/6%
d. 100%

23. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.

Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be:
a. 56 1/4%
b. 62 1/2%
c. 75%
d. 79 1/6%

Problems

8-1 Piper Company purchased Snead Company common stock through open-market purchases as follows:
Acquired
Date Shares Cost
1/1/09 1,500 $ 50,000
1/1/10 3,300 $ 90,000
1/1/11 6,600 $250,000

Snead Company had 12,000 shares of $20 par value common stock outstanding during the entire period. Snead had the following retained earnings balances on the relevant dates:

January 1, 2009 $ 90,000
January 1, 2010 30,000
January 1, 2011 150,000
December 31, 2011 300,000

Snead Company declared no dividends in 2009 or 2010 but did declare $60,000 of dividends in 2011. Any difference between cost and book value is assigned to subsidiary land. Piper uses the equity method to account for its investment in Snead.

Required:
A. Prepare the journal entries Piper Company will make during 2010 and 2011 to account for its investment in Snead Company.
B. Prepare workpaper eliminating entries necessary to prepare a consolidated statements workpaper on December 31, 2011.

8-2 On January 1, 2008, Patel Company acquired 90% of the common stock of Seng Company for $650,000. At that time, Seng had common stock ($5 par) of $500,000 and retained earnings of $200,000.

On January 1, 2010, Seng issued 20,000 shares of its unissued common stock, with a market value of $7 per share, to noncontrolling stockholders. Seng’s retained earnings balance on this date was $300,000. Any difference between cost and book value relates to Seng’s land. No dividends were declared in 2010.

Required:
A. Prepare the entry on Patel’s books to record the effect of the issuance assuming the cost method.
B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on December 31, 2010 assuming the cost method.

8-3 Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on January 1, 2010. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained earnings. Silas Company’s income earned and increase in retained earnings during 2010 and 2011 were:

2010 2011
Income earned $260,000 $360,000
Increase in Retained Earnings 200,000 300,000

Silas Company income is earned evenly throughout the year.

On September 1, 2011, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company uses the cost method to account for its investment in Silas Company.

Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on December 31, 2011.

8-4 Pelky made the following purchases of Stark Company common stock:

Date Shares Cost
1/1/10 70,000 (70%) $1,000,000
1/1/11 10,000 (10%) 160,000

Stockholders’ equity information for Stark Company for 2010 and 2011 follows:

2010 2011
Common stock, $10 par value $1,000,000 $1,000,000

1/1 Retained earnings 300,000 380,000
Net income 110,000 140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31 $1,380,000 $1,480,000

On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock on the open market for $22 per share. The shares sold were purchased on January 1, 2010. Stark notified Pelky that its net income for the first six months was $70,000. Any difference between cost and book value relates to subsidiary land. Pelky uses the cost method to account for its investment in Stark Company.

Required:
A. Prepare the journal entry made by Pelky to record the sale of the 14,000 shares on July 1, 2011.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2011.
C. Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet on December 31, 2011.

8-5 P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January 1, 2007, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained Earnings of $800,000. The difference between cost and book value relates to goodwill.

On January 2, 2010, S Company purchased 20,000 of its own shares from noncontrolling interests for cash of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to $1,000,000 by January 2, 2010. S Company uses the cost method in regards to its treasury stock and P Company uses the equity method to account for its investment in S Company.

Required:
Prepare all determinable workpaper entries for the preparation of consolidated statements on December 31, 2010.

8-6 Penner Company acquired 80% of the outstanding common stock of Solk Company on January 1, 2008, for $396,000. At the date of purchase, Solk Company had a balance in its $2 par value common stock account of $360,000 and retained earnings of $90,000. On January 1, 2010, Solk Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for $3 per share. On this date, Solk Company had a retained earnings balance of $152,000. The difference between cost and book value relates to subsidiary land. No dividends were paid in 2010. Solk Company reported income of $30,000 in 2010.

Required:
A. Prepare the journal entry on Penner’s books to record the effect of the issuance assuming the equity method.
B. Prepare the eliminating entries needed for the preparation of a consolidated statements workpaper on December 31, 2010, assuming the equity method.

8-7 Petty Company acquired 85% of the common stock of Selmon Company in two separate cash transactions. The first purchase of 108,000 shares (60%) on January 1, 2009, cost $735,000. The second purchase, one year later, of 45,000 shares (25%) cost $330,000. Selmon Company’s stockholders’ equity was as follows:

December 31 December 31
2009 2010

Common Stock, $5 par $ 900,000 $ 900,000
Retained Earnings, 1/1 262,000 302,000
Net Income 69,000 90,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders’ Equity, 12/31 $1,201,000 $1,254,000

On April 1, 2010, after a significant rise in the market price of Selmon Company’s stock, Petty Company sold 32,400 of its Selmon Company shares for $390,000. Selmon Company notified Petty Company that its net income for the first three months was $22,000. The shares sold were identified as those obtained in the first purchase. Any difference between cost and book value relates to goodwill. Petty uses the partial equity method to account for its investment in Selmon Company.

Required:
A. Prepare the journal entries Petty Company will make on its books during 2009 and 2010 to account for its investment in Selmon Company.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2010.

Short Answer
1. A parent’s ownership percentage in a subsidiary may change for several reasons. Identify three reasons the ownership percentage may change.

2. A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional shares of stock by the subsidiary. Describe the affect on the parent’s investment account when the new shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders.

Short Answer Question from the Textbook

1. Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary.

2. Why is the date of acquisition of subsidiary stock important under the purchase method?

3. When a parent company has obtained control of a subsidiary through several purchases and subsequently sells a portion of its shares in the subsidiary, how is the carrying value of the shares sold determined?

4. When a parent company that records its investment using the cost method during a fiscal year sells a portion of its investment, explain the correct accounting for any differences between selling price and recorded values.

5. ABC Corporation purchased 10,000 shares(80%) of EZ Company at $35 per share and sold them several years later for $35 per share. The consolidated income statement reports a loss on the sale of this investment. Explain.

6. Explain how a parent company that owns less than100% of a subsidiary can purchase an entire new is-sue of common stock directly from the subsidiary.

7. When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the increase be reflected in the financial statements? What if it results in a decrease?

8. P Company holds an 80% interest in S Company. Determine the effect (that is, increase, decrease, no change, not determinable) on both the total book value of the noncontrolling interest and the noncontrolling interest’s percentage of ownership in the net assets of S Company for each of the following situations:
a. P Company acquires additional shares directly from S Company at a price equal to the book value per share of the S Company stock immediately prior to the issuance.
b. S Company acquires its own shares on the open market. The cost of these shares is less than their book value.
c. Assume the same situation as in (b) except that the cost of the shares is greater than their book value.
d. P Company and a noncontrolling stockholder each acquire 100 shares directly from S Com-pany at a price below the book value per share.

Business Ethics Question from Textbook

During a recent review of the quarterly financial statements and supporting ledgers, you noticed several un-usual journal entries. While the dollar amounts of the journal entries were not large, there did not appear to be supporting documentation. You decide to bring the matter to the attention of your immediate supervisor. After you mentioned the issue, the supervisor calmly stated that the matter would be looked into and that you should not worry about it.1.You feel a bit uncomfortable about the situation. What is your responsibility and what action, if any, should you take?

Chapter 10

Insolvency – Liquidation and Reorganization

Multiple Choice

1. A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.

2. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is not one of the three possible courses of action?
a. The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings.
b. The debtor continues operating the business in the normal course of the day-to-day operations.
c. The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7.
d. The debtor or its creditors may file a petition for reorganization under Chapter 11.

3. Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a. book value of the debt.
b. book value of the transferred assets.
c. fair market value of the debt.
d. fair market value of the transferred assets.

4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:
a. accept less than the full amount of their claims.
b. delay settlement of the claim until a latter date.
c. force the debtor into a liquidation.
d. accrue interest at a higher rate.

5. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring:
a. will equal the creditor’s gain on restructuring.
b. will equal the creditor’s loss on restructuring.
c. may not equal the creditor’s gain on restructuring.
d. may not equal the creditor’s loss on restructuring.

6. A bankruptcy petition filed by a firm is a:
a. chapter petition.
b. involuntary petition.
c. voluntary petition.
d. chapter 11 petition.

7. When a bankruptcy court enters an “order for relief” it has:
a. accepted the petition.
b. dismissed the petition.
c. appointed a trustee.
d. started legal action against the debtor by its creditors.

8. An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least:
a. two creditors.
b. three creditors.
c. five creditors.
d. six creditors.

9. The duties of the trustee include:
a. appointing creditors’ committees in liquidation cases.
b. approving all payments for debts incurred before the bankruptcy filing.
c. examining claims and disallowing any that are improper.
d. calling a meeting of the debtor’s creditors.

10. Which of the following items is not a specified priority for unsecured creditors in a bankruptcy petition?
a. Administration fees incurred in administering the bankrupt’s estate.
b. Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.
c. Unsecured claims of governmental units for unpaid taxes.
d. Unsecured claims on credit card charges that do not exceed $3,000.

11. Which statement with respect to gains and losses on troubled debt restructuring is correct?
a. Creditors losses on restructuring are extraordinary.
b. Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary.
c. Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.
d. Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.

12. When fresh-start reporting is used according to Statement of Position (SOP) 90-7, the implication is that a new firm exists. Which of the following statements is not correct about fresh-start accounting?
a. Assets are reported at fair values.
b. Beginning retained earnings is reported at zero.
c. The fair value of the assets must be less than the post liabilities and allowed claims.
d. The original owners must own less than 50% of the voting stock after reorganization.

13. A Statement of Affairs is a report designed to show:
a. an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.
b. a balance sheet prepared on the going-concern assumption.
c. assets and liabilities classified as current and noncurrent.
d. assets and liabilities reported at their current book values.

14. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion:
a. of the claim cannot be collected by the creditor.
b. remains as a secured claim.
c. is classified as an unsecured priority claim.
d. is classified as an unsecured nonpriority claim.

15. Layne Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Layne report as a gain on its income statement?
a. $0.
b. $180,000.
c. $225,000.
d. $405,000.

16. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Nen report as ordinary gain (loss) on transfer of real estate?
a. $(30,000).
b. $30,000.
c. $120,000.
d. $150,000.

17. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Baker report as a gain or (loss) on restructuring?
a. $120,000 ordinary loss.
b. $120,000 extraordinary loss.
c. $150,000 ordinary loss.
d. $150,000 extraordinary loss.

18. Dobler Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobler for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is:
a. $25,000.
b. $40,000.
c. $50,000.
d. $75,000.

19. Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000

Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?

a. $720,000.
b. $840,000.
c. $960,000.
d. $1,080,000.

20. The final settlement with unsecured creditors is computed by dividing:
a. total net realizable value by total unsecured creditor claims.
b. net free assets by total secured creditor claims.
c. total net realizable value by total secured creditor claims.
d. net free assets by total unsecured creditor claims.

21. Dodge Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring income taxes, what amount should Dodge report as a gain on its income statement?
a. $0.
b. $100,000.
c. $125,000.
d. $225,000.

22. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:

Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should Drier report as ordinary gain (loss) on transfer of real estate?
a. $(25,000).
b. $25,000.
c. $100,000.
d. $125,000.

23. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:

Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should Cole report as a gain or (loss) on restructuring?
a. $100,000 ordinary loss.
b. $100,000 extraordinary loss.
c. $125,000 ordinary loss.
d. $125,000 extraordinary loss.

24. Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts:

Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 450,000 $ 555,000
Assets pledged partially secured creditors 270,000 180,000
Free assets 630,000 480,000
$1,350,000 $1,215,000

Liabilities
Liabilities with priority $ 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
$1,605,000

Assume the assets are converted to cash to their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?
a. $360,000.
b. $420,000.
c. $480,000.
d. $540,000.

25. Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Cerner holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000. The amount to be realized by Cerner on this note is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.

Problems

10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Bargain Mart was unable to pay the previous year’s interest. City Bank agreed to settle Bargain Mart’s debt in exchange for land having a fair market value of $1,310,000. Bargain Mart purchased the land in 2003 for $1,000,000.

Required:
Prepare the journal entries to record the restructuring of the debt by Bargain Mart.

10-2 On January 1, 2010, Gannon, Inc. owed BancCorp $12 million on a 10% note due December 31, 2011. Interest was last paid on December 31, 2008. Gannon was experiencing severe financial difficulties and asked BancCorp to modify the terms of the debt agreement. After negotiation BancCorp agreed to:
– Forgive the interest accrued for the year just ended,
– Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2011, and
– Reduce the unpaid principal amount to $9,600,000.

Required:
Prepare the journal entries for Gannon, Inc. necessitated by the restructuring of the debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012.

10-3 On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2005, and was due December 31, 2014. Annual interest was last paid on December 31, 2009. Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties.

Required:
Prepare all journal entries for Stevens, Inc. to record the restructuring and any remaining transactions relating to the debt under each independent assumption.
A. First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000.
B. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.

10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000, 8% loan receivable from Neer Corporation because of Neer’s financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows:
– Reduce the loan from $900,000 to $600,000;
– Extend the maturity date by 2 years from December 31, 2011 to December 31, 2013;
– Reduce the interest rate on the loan from 8% to 6%.

Present value assumptions:
Present value of $1 for 2 years at 6% = 0.8900
Present value of $1 for 2 years at 8% = 0.8573
Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334
Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833

Required:
Compute the gain or loss that will be reported by Community Bank.

10-5 Donnelly Corporation incurred major losses in 2010 and entered into voluntary Chapter 7 bankruptcy in the early part of 2011. By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows.

Accounts payable $ 48,000
Claims prior to the trustee’s appointment 21,000
Property taxes payable 18,000
Wages payable (all under $4,650 per employee) 54,000
Unsecured note payable 60,000
Accrued interest on the note payable 6,000
Administrative expenses of the trustee 30,000
Total $237,000

Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.

10-6 Davis Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2011. Data relevant to its financial position as of this date are:
Estimated Net
Book Value Realizable Values
Cash $ 3,000 $ 3,000
Accounts receivable-net 72,000 48,000
Inventories 60,000 72,000
Equipment-net 165,000 87,000
Total assets $300,000 $210,000

Accounts payable $ 72,000
Rent payable 21,000
Wages payable 45,000
Note payable plus accrued interest 96,000
Capital stock 180,000
Retained earnings (deficit) (120,000)
Total liabilities and equity $300,000

Required:
A. Prepare a statement of affairs assuming that the note payable and interest are secured by
a mortgage on the equipment and that wages are less than $4,650 per employee.
B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized.

10-7 The following data are taken from the statement of affairs of Mitchell Company.

Assets pledged with fully secured creditors
(Realizable value, $635,000) $800,000
Assets pledged with partially secured creditors
(realizable value, $300,000) 365,000
Free assets (Realizable value, $340,000) 535,000
Fully secured creditor claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditor claims 1,165,000

Required:
Compute the amount that will be paid to each class of creditor.

10-8 On February 1, 2011, Hilton Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2011, including the following provisions:

1. Accrued expenses of $21,930, representing priority items, are to be paid in full.
2. Hilton Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors. The estimated fair value of the receivables is $104,000.
3. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement.
4. Hilton Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on September 1, 2011, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled. In addition, no interest is to be charged during the remaining five years to maturity of the note.

Required:
Prepare journal entries on the books of Hilton Company to give effect to the preceding provisions.

Short Answer

1. The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims.

2. Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially secured, and unsecured creditors.

Short Answer Questions from the Textbook

1. List the primary types of contractual agreements between a debtor company and its creditors and briefly explain what is involved in each of them.

2. Distinguish between a voluntary and involuntary bankruptcy petition.

3. Distinguish among fully secured, partially se-cured, and unsecured claims of creditors.

4. Five priority categories of unsecured claims must be paid before general unsecured creditors are paid. Briefly describe what makes up each category.

5. What are “dividends” in a bankruptcy proceeding?

6. For each of the following debt restructurings, indicate whether a gain is recognized and, if so, how the gain is measured and reported. (a)Transfer of assets by the debtor to the creditor.(b)Grant of an equity interest by the debtor to the creditor.(c)Modification of the terms of the payable.

7. What is the purpose of a Statement of Affairs?

8. One of the officers of a corporation that had just received a discharge in bankruptcy said, “Good, now we don’t owe anyone.” Is he correct?

9. What are the duties of a trustee in a liquidation proceeding?

10. What is the purpose of a combining work paper prepared by a trustee?

11. What is the purpose of a realization and liquidation account?

Business Ethics Question from Textbook

From an ethical perspective, some believe that it is never justifiable for an individual or business to declare bankruptcy. Others believe that some actions are appropriate only in extreme circumstances. Without question, as stated in the Journal of Accountancy, November 2005,page 51, “the ease with which debtors have been able to walk away from debt has frustrated creditors for years.”
1. Describe the differences between Chapter 7 (liquidations) and Chapter 11 (reorganizations)from an ethical standpoint. Who is most likely to be hurt by a Chapter 7 bankruptcy?
2. Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Do you believe the changes wrought by this act will serve to protect creditors?
3. The Protection Act of 2005 requires individuals, but not businesses, to undergo a “means” test before they can seek Chapter 7 relief. Do you believe this change should be applied to businesses as well? Why or why not?
4. Do you think that you would ever resort to filing for bankruptcy relief yourself? Why or why not?
Chapter 11

International Financial Reporting Standards

Multiple Choice—Conceptual

1. The goals of the International Accounting Standards Committee include all of the following except
a. To improve international accounting.
b. To formulate a single set of auditing standards to be applied in all countries.
c. To promote global acceptance of its standards.
d. To harmonize accounting practices between countries.

2. Which of the following is true about the FASB after the mandatory adoption of IFRS by US companies?
a. The FASB will serve in an advisory capacity to the IASB.
b. The FASB will remain the designated standard-setter for US companies, but incorporate IFRS into US GAAP.
c. The role of the FASB post-IFRS adoption has not been determined.
d. The FASB will cease to exist.

3. Milestones in the transition plan for mandatory adoption of IFRS by US companies include all of the following except:
a. Improvements in accounting standards.
b. Limited early adoption of IFRS in an effort to enhance comparability for US investors
c. Mandatory use of IFRS by US entities.
d. All of the above are milestones in the transition plan for mandatory adoption of IFRS by US companies.

4. The roles of the IASC Foundation include
a. establishing global standards for financial reporting.
b. coordinating the filing requirements of stock exchange regulatory agencies.
c. financing IASB operations.
d. all of the above are roles of the IASC Foundation.

5. Which of the following statements is true regarding the IASC?
a. The IASC is a public-sector, not-for-profit organization.
b. The IASC is accountable to an international securities regulator.
c. The IASC is a stand-alone, private-sector organization.
d. The IASC funds the operations of the IASB through filing fees paid to national securities regulators.

6. . Concerns of the SEC with regard to the mandatory adoption of IFRS by US entities include all of the following except:
a. the extent to which the standard-setting process addresses emerging issues in a timely manner.
b. the security and stability of IASC funding.
c. the enhancement of IASB independence through a system of voluntary contributions from firms in the accounting profession.
d. the degree to which due process is integrated into the standard-setting process .

7. . Under the staged transition to mandatory adoption of IFRS being considered by the SEC,
a. large, accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2011.
b. non-accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2015.
c. large non-accelerated filers would have until fiscal years beginning on or after December 15, 2017 to adopt IFRS.
d. smaller reporting companies would begin IFRS filings for fiscal years beginning on or after December 15, 2016.
.
8. In order to complete its first IFRS filing, including three years of audited financial statements, according to the staged transition to mandatory adoption of IFRS considered by the SEC, a large accelerated filer would need to adopt IFRS beginning in fiscal year
a. 2011.
b. 2012.
c. 2013.
d. 2014.

9. Benefits of the FASB Accounting Standards Codification (ASC) include all of the following except
a. increases the independence of the FASB.
b. aids in the convergence of US GAAP with IFRS.
c. reduces time and effort required to research accounting issues.
d. clearly distinguishes between authoritative and non-authoritative guidance.

10. SFAS No.162, the Accounting Standards Codification, is directed to
a. auditors.
b. Boards of Directors.
c. securities regulators.
d. entities.

11. IFRS and US GAAP differ with regard to financial statement presentation in all of the following except
a. IFRS generally requires that assets be listed in order of increasing liquidity while US GAAP requires that assets be listed in order of decreasing liquidity.
b. US GAAP requires expenses to be listed by function while IFRS requires expenses to be listed by nature.
c. IFRS prohibits extraordinary items which are allowed by US GAAP.
d. IFRS requires two years of comparative income statements while under US GAAP, three years of income statements are required.

12. The major difference between IFRS and US GAAP in accounting for inventories is that
a. US GAAP prohibits the use of specific identification.
b. IFRS requires the use of the LIFO cost flow assumption.
c. US GAAP prohibits the use of the LIFO cost flow assumption
d. US GAAP allows the use of the LIFO cost flow assumption.

13. One difference between IFRS and GAAP in valuing inventories is that
a. IFRS, but not GAAP, allows reversals so that inventories written down under lower-of-cost-or-market can be written back up to the original cost .
b. GAAP defines market value as replacement cost where IFRS defines market as the selling price.
c. GAAP strictly adheres to the historical cost concept and does not allow for write-downs of inventory values while IFRS embraces fair value.
d. IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market.

14. In accounting for research and development costs.
a. the general rule under both US GAAP and IFRS is that research and development costs should be expensed as incurred .
b. IFRS generally expenses all research and development costs while US GAAP expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.
c. US GAAP generally expenses all research and development costs while IFRS expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.
d. both US GAAP and IFRS expense research costs as incurred but capitalize development costs once technological and economic feasibility has been demonstrated.
.
15. Property, plant and equipment are valued at
a. historical cost under both IFRS and US GAAP.
b. historical cost or revalued amounts under both IFRS and US GAAP.
c. revalued amounts under IFRS.
d. historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts.

16. The amount of a long-lived asset impairment loss is generally determined by comparing
a. the asset’s carrying amount and its fair value under US GAAP.
b. the asset’s carrying amount and its discounted future cash flows less cost to sell under IFRS.
c. the asset’s carrying amount and its undiscounted future cash flows under US GAAP.
d. the asset’s carrying amount and its undiscounted future cash flows less disposal cost under IFRS.

17. In accounting for liabilities, IFRS interprets “probable” as
a. likely.
b. more likely than not.
c. somewhat possible.
d. possible and not remote.

18. Accounting under IFRS and US GAAP is similar for all of the following topics except
a. changes in estimates.
b. related party transactions.
c. research and development costs.
d. changes in methods.

Use the following information to answer the next three questions.

On January 1, 2010, AirFrance purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows:

Component Cost Useful life
Frame €7,200,000 24 years
Engine 4,800,000 20 years
Other 2,400,000 10 years

AirFrance uses the straight-line method of depreciation. The asset is assumed to have no salvage value.

19. Under IFRS, the entry to record the acquisition of the airplane would include
a. a debit to Asset/ Airplane of €14,400,000.
b. a debit to Asset/ Airplane frame of €14,400,000.
c. a debit to Asset/ Airplane engine of €4,800,000.
d. cannot be determined from the information given.

20. Under US GAAP, the entry to record depreciation expense on the asset at December 31, 2011 will include
a. a credit to accumulated depreciation of €1,200,000.
b. a debit to depreciation expense of €1,440,000
c. a debit to depreciation expense of €800,000.
d. a credit to accumulated depreciation of €600,000.

21. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2011 will include a credit to accumulated depreciation of
a. €1,440,000.
b. €1,200,000
c. €800,000.
d. €600,000.

22. Accounting terminology that differs between IFRS and US GAAP include all of the following except
a. the use by IFRS of “turnover” for revenue.
b. the use by IFRS of “share premium” for additional paid-in-capital.
c. the use by IFRS of “other capital reserves” for retained earnings.
d. the use by IFRS of “issued capital” for common stock.

23. New terminology introduced under the joint IFRS- US GAAP Customer Consideration (Allocation) Model includes all of the following except
a. revenue recognition voids.
b. contract rights.
c. net contract asset/ liability.
d. performance obligations.

24. Under IFRS, the criteria to determine whether a lease should be capitalized include
a. the present value of the minimum lease payments is 90% or more of the fair value of the asset at the inception of the lease.
b. the term of the lease is 75% or more of the economic life of the asset.
c. the term of the lease is equal to substantially all of the economic life of the asset.
d. the present value of the minimum lease payments is equal to substantially all of the fair value of the asset at the inception of the lease.

Use the following information to answer the next three questions.

Bellingham Electronics Inc. offers one model of laptop computer for £1000 and a two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a limited-time offer for the laptop, including delivery and the two-year warranty for £1,180. The cost of the computer to Bellingham is £700. Any warranty repairs are assumed to be done ratably over time. Bellingham accounts for transactions using the customer consideration model.

In the first twelve months following the sale, Bellingham incurred £980 of costs servicing the computers under warranty.

25. Bellingham sells ten laptops to Bertram Inc. under the limited-time promotion. Upon delivery of the laptops to Bertram, Bellingham will recognize revenue of
a. £9,300.
b. £9,440
c. £10,000.
d. £11,800.

26. In the first twelve months following the sale, Bellingham would reduce the Contract liability – warranty account by
a. £784.
b. £980
c. £1,180.
d. £1,380.

27. In the first twelve months, Bellingham would record warranty expense of
a. £784.
b. £980
c. £1,180.
d. £1,380.

28. Significant differences between IFRS and Chinese GAAP include all of the following except
a. Chinese GAAP allows the use of LIFO while IFRS prohibits it.
b. Chinese GAAP has different related party disclosure requirements.
c. Chinese GAAP follows the cost principle while IFRS allows for revaluations and recoveries of impairment losses.
d. Chinese GAAP uses the equity method of accounting for jointly controlled entities while IFRS also allows proportionate consolidation.

29. All of the following are options for non-US companies who wish to list securities on a US exchange except
a. The company can use either IFRS or their local GAAP.
b. If a company uses their local GAAP they must reconcile net income and shareholders’ equity or fully disclose all financial information required of US companies.
c. If a company uses their local GAAP they must reconcile net income and shareholders’ equity and fully disclose all financial information required of US companies
d. The company must file a form 20-F with the SEC.

30. All of the following are true regarding American Depository Receipts (ADRs) except
a. Most ADRs are unsponsored, meaning that the DR bank creates a DR program without a formal agreement with the issuing non-US company.
b. An ADR is a derivative instrument traded in the US that usually represents a fixed number of publicly traded shares of a non-US company.
c. ADRs are denominated in US dollars.
d. A Level 1 sponsored ADR is the easiest way for a non-US company to access US markets.

Exercise from the Textbook

Exercise 11-1

Component Depreciation SMC Company purchases a building for $100,000. Included in this cost are $12,000 for electrical systems and $15,000 for the roof. The building is expected to have a 40 year useful life, but the electrical system will last for 20 years and the roof will last 15 years.

Required: Part A: Assuming that straight-line depreciation is used, compute depreciation expense assuming that U.S. GAAP is used.

Part B: Assuming that straight line depreciation is used, compute depreciation expense for year one assuming IFRS is used (assume component depreciation).

Problem from the Textbook

Problem 11-4

Prepare a statement of financial position using the proposed new format as described in the chapter.

Questions from the Textbook

1. As mentioned in Chapter 1, the project on business combinations was the first of several joint projects undertaken by the FASB and the IASB in their move to converge standards globally. Nonetheless, complete convergence has not yet occurred, and there are those who believe it to be a poor idea. Discuss the reasons for and against global convergence.

2. In recent months, virtually every topic that has come to the attention of the standard setters has been undertaken as a joint effort of the FASB and the IASB rather than as an individual effort by one of the two boards. List and discuss some of the joint projects that fall into this category.
3. What is the rationale for the harmonization of international accounting standards?

4. Why is the SEC, once so reluctant to accept IAS, now very willing to allow firms using IFRS to is-sue securities in the U.S. stock market without reconciling to U.S. GAAP?

5. Discuss the types of ADRs that non-U.S. companies might use to access the U.S. markets.

6. Describe the attitude of the FASB toward the IASB (International Accounting Standards Board).

7. How does the FASB view its role in the development of an international accounting system? Currently, two members of the IASB board were affiliated with the FASB. Comment on what effect this might have on the likelihood that the U.S. standard setters will accept the new IASB statements, if any?

8. List some of the major differences in accounting between IFRS and U.S. GAAP.

Business Ethics Question from the Textbook

A vice president of marketing for your company has been charged with embezzling nearly $100,000 from the company. The vice president allegedly submitted fraudulent vendor invoices in order to receive payments. As the vice president of marketing for the company, the vice president is authorized to approve the payment of invoices submitted by third-party vendors who did work for the company. After the activities were uncovered, the company responded by stating: “All employees are accountable to our ethics guidelines and procedures. We do not tolerate violations of our ethics policy and will consistently enforce these policies and procedures.”

1. How would you evaluate the internal controls of the company?

2. Do you think there are companies that develop comprehensive ethics and compliance pro-grams for mid- and lower-level employees and ignore upper-level executives and managers?

3. Is it an ethical issue if companies are not forth-coming concerning fraudulent activities of top executives in an effort to minimize negative publicity?

Chapter 12

Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk

Multiple Choice

1. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:
a. hedge of a net investment in a foreign entity.
b. hedge of an exposed asset or liability position.
c. hedge of an identifiable foreign currency commitment.
d. contract acquired to speculate in the movement of exchange rates.

2. The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:
a. included as a separate component of stockholders’ equity.
b. amortized over the life of the forward contract.
c. deferred and included in the measurement of related foreign currency transaction.
d. none of these.

3. An indirect exchange rate quotation is one in which the exchange rate is quoted:
a. in terms of how many units of the domestic currency can be converted into one unit of foreign currency.
b. for the immediate delivery of currencies exchanged.
c. in terms of how many units of the foreign currency can be converted into one unit of domestic currency.
d. for the future delivery of currencies exchanged.

4. A transaction gain is recorded when there is an:
a. importing transaction and the exchange rate increases.
b. exporting transaction and the exchange rate increases.
c. exporting transaction and the exchange rate decreases.
d. none of these.

5. During 2011, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2012. For the years 2011 and 2012, transaction gains or losses should be recognized as:
2011 2012
a. gain gain
b. gain loss
c. loss loss
d. loss gain

6. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:
a. hedge a net investment in a foreign entity.
b. hedge an identifiable foreign currency commitment.
c. speculate in foreign currency.
d. none of these.

7. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74

The entry to record the forward contract is
a. FCU Receivable 350,000
Premium on Forward Contract 15,000
Dollars Payable 365,000

b. Dollars Receivable 365,000
Discount on Forward Contract 15,000
FCU Payable 350,000

c. FCU Receivable 365,000
Discount on Forward Contract 15,000
Dollars Payable 350,000

d. Dollars Receivable 350,000
Discount on Forward Contract 15,000
FCU Payable 365,000

8. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Receivable Balance Gain/Loss Recorded
a. $319,500 $9,000 gain
b. $319,500 $9,000 loss
c. $333,000 $4,500 gain
d. $333,000 $18,000 gain

9. A transaction gain or loss at the settlement date is:
a. a change in the exchange rate quoted by a foreign exchange trader.
b. synonymous with the translation of foreign currency financial statements into dollars.
c. the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.
d. the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

10. From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:
a. measured in a foreign currency.
b. denominated in a foreign currency.
c. measured in U.S. currency.
d. denominated in U.S. currency.

11. The exchange rate quoted for future delivery of foreign currency is the definition of a(n):
a. direct exchange rate.
b. indirect exchange rate.
c. spot rate.
d. forward exchange rate.

12. A transaction loss would result from:
a. an increase in the exchange rate applicable to an asset denominated in a foreign currency.
b. a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
c. the import of merchandise when the transaction is denominated in a foreign currency.
d. a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:
a. extends beyond one year or the current operating cycle.
b. is a hedge of an identifiable foreign currency commitment.
c. is a hedge of an exposed net liability position.
d. was acquired to speculate in foreign currency.

14. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:
a. included as a separate item in the stockholders’ equity section of the balance sheet.
b. recognized currently in the determination of net income.